1 complaint 01/19/2003
TRANSCRIPT
0
Peter D. Morgenstern (PM-51t21 }
t iregory A. Blue (GB-9569)
Kale We)ber-Pi(cock IKP-9576)
HR. GA14 WEXI FR I;A LL & IvIORUHNS1'ERN, LL.P
885 Third Avenue, Suite 3040
New York, NY 1002?
(212) 308-5858
I ax: (212) 486-0462
UNH ED STATES DIS'1-RIC F COURT
SOil l'1-[ERN DI5'I'RI(."I UI NEW YORK_..... ------ •--------------------------------------------------------- t
ALEXANDRA 1.1. BAI.LAP1) and It. RItINCKIs1RIIOFF
LOW1;RY, [ rL3steeS o the Alexandra Hixon Ballard Irusl;
DYI,AN I-[, HIXON, T uste< of the Alcxandia Trust under
[lie ICI I Lex Trust; DY]LAN 11. HIXON, Trustee of the
Alexandra Trust under the JMI-I Lox Trust; DYLAN H.I IIXON, Trustee oft lie Dylan Trust under the ICI-[ 1,ox s ;
DYLAN; 1]. HIXON, Trustee of the Dylan '1'rnst under the
JNII I f.ex Trust; DYI .AN [ I. HIXON, Trustee of the Iinrlia
1'rust under the I('1 i Lox Trust; DY1,AN f-I. 111XC)N, 1'r isteer+f'tho.India Trust under the JMI I Lex 'T'rust; DYLAN 1-1.
I I]XON, Trustee nf•the S}zanti 'Trust under the ICI I f.ex Trust;
I)YI.AN 11, 1-1] XON, 'T'rustee of the tihanti 'I'rusI nu der theJNI1-1 Lex Trust; ANDREW It. HIX[)N,'Ifrustee of the ICI I
Ando frost; ANDREW R. IIIX{)N, 1 rue ul the JMI-1An(io Frost; ANDREW R. I IIXON and MIC'IILI.E M.
DIXON, Trustees cal the Andrew anti Mie.hclc 1-Iixon 't)01
Trust; 1)};13RA P. GEIGI:R,'l'rustcc Dehra l'. {iciger
Living 't'rust; DEVON GEIGER NIELSEN, I rustee of the
Dc von Geiger Nielsen Liv'in ,'trust; DYLAN [ i. I IIX()N and
It. BRINC'KERIIOFI LOW'ERY, 't'rustees of the Dyiaal l i sun I )4r1 't'rust; BE '1 b Y I I U NI ER GEIGER, rrrusiee o t ,the Elizabeth 11. Hunter '[rust flblu Betsy 11. Geiger; I- RAN Kf I IX()N FOSTER, Trustee of the Frank Hixon Foster I () 99['rust; BEFSY I II-WTI,"R GEIGER, 'I rustee of the frank P.IIixoii Trust 17b/cti Betsy 11. Geiger; INDIA T. RA1)1,AIC and1.. 13 IIINEKEROFF LUWIERY. Trustees ul•the India 1 ' .Radliu Tr' t dated May 1 I, 1948, WILLIAM 1)ODI)GEIGE1. i ,'t'rustee nt'tlie William Dodd Geiger 111 1981)Revocable Trust dated Junto 0, 1989: BARBARA [-f M 1:RF(-)S l I R.'I rustee ufthe Foster family "l rust A, PALIHNF
11. TI JR.PIN, Trustee of the Frank P. [limn Trust 17biu1'ttulilie 11.I`uipitt; PAIJI-INE 1-1. T'LJRPNN, T'rus[CC 0i'[]1eL lizaheth I Iixoii Huntcr -1 rust I/b/u Pauline 11. Turpin:GEORGE B. TURPIN. Trustee cif the George 13, and Pauline
:11b
iii,^^^rli^^:e. 4 1 . 1
CO(M1'I.:AINT
.11112Y TRIAL
DEMANDED
H. '1'urpin Trust; PAUL H. TIJRPIN, Trustee of the TurpinFamily 1992 Revocable 'T'rust dated December 16, 1992,GEORGE B. TURPI I, JR., •l rustee of the George B. I
Iurpiit,
Jr. Living Trust dated August 29, 1995; BRIER
ALLEBRAND, Trustee of the Allebrand Living Trust datedApril 30, 1993; BETSY Hi 1NTFR GEIGER, Trustee of theGeiger Family Revocable Trust; BARBARA UIJNTFRZ
FOSTER,']'rustcc of the Elizabeth 11. Iiunter Trust f,b/oBarbara I-lunter Foster; BAR BAR A 14UN'I•ER FOSTER,Trustee of the Frank P. Nixon Trust Vb/o Barbara HunterFoster; ADELAIDE E. FOSTER; E. CAGE FOSTI-iRWOODARD; HUGH K- FOSTER, JR.; JENNIFER 13.F.F.
WAL'I'ON4; ANDREW R. HIXON, Trustee ofthe Andrew R.Nixon Trust; SIIANTI IIIXON, Trustee of the Shanti ]iixuuRevocable'c'rust;
Plaintiffs,V.
TYCO INTERNATI[)NAL, LTD.; L. DI"NNISKO/LO\VSKI; MARK H. SWARTZ; MARK A. BEI_NICKFRANK E. WALSH, JR.; MICFIAEL A. ASHCROI T, andPiZICEWATERHOUSECOOPERS LLP,
IJe fend ants.
--------------------
Plaintiffs, by their attorneys, for their Comlzlaicrt, allege upon pet unaI knowledge as to
themselves acid their own acts, and upon information and belief as to all o thci- mutters , based
upon, inter alia, the investigation made by and through then' attorneys ,ind representatives, which
invcsti ation included, without limitation, review and analysis of vat10LIS 1)1uhlh Iiienieial d[iuNi
and statements. including d :unients filed with the Scuuritie5 and FXL:11M1Vu ('owInission
(-'S, 17("'), 3news and media reports, and report" t} f securities analysts:'
Plaintif1^i bc]icvc that after a rc-asunable uppU rlciily iii ditiru very. Ilinher stihstarnial CVIcltnlian tinpp rtwill exist for the following sllegatioiis.
6 0
NATURE TIIE ACTION
I . This is an action based upon the defendants' violations cif the Iekleral securities
laws, cot-anion law fraud, and negligent misrepresentation. Plaintiffs in this action were major
shareholders of AMP, Inc. (AMP") until AMP'S April 1999 merger with detenk lant Tyco
International Ltd . (Tyco' and the "AMP/ Vyeo Merger' ), at which time PIai:iti1 4s becameTyco
shareholders . In this suit, Plaintiffs seek to recover damages for losses that they' suI iercd as a
result of the defendants' materially inisleatling s111Ioiiu:iiI and the defendant,' failure to fully
disclose 3iialerial facls-
2- Prim- lo and in connection with the AMPI1 yco Merger and 1 'or nearly two years
I'() lowing the merger, the Tyco Defendants pursued a scheme to mislead i livestors , ilmeluding the
Plaintiffs in the fallowing ways:
(a) Touting Tyco's success as a tuna-around speciziIisi able io quickly createvalue in newly-acquired companies, when in fact, •t yea's claimed positive post mergerfillnings were created by using inappropriate accounting and auditing triers to misleadinvestors.
(h) Consistently claiming huge Increases In 'I yco's ()pcrxtiiig profits andattributing the success to "organic" g=rowth and synergies from 'T'yco,, acquisitions, whenin fact, Tyco was not as profitable as claimed and the appeai-auc•.e of high earnings wascreated by fraudulent accounting manipulations.
(c) Concealing the systematic abuse by'I yco's top exceeiilives td theL'ompany's executive compensation programs and the officers' misappropriation of'l'ycu
• funds for their personal use.
3
S
JURISDICTION AND VENUE
3_ This Co urt has jurisdiction over the subject matter of this action pursuant to 28
U.S.C, y§ 1331 and 1337, yti 22 of the Securities Act (it 1913 (the "33 Act'), 15 U.S.C. w 77v.
and 27 nt'the Securities Exchange Act of-1934 (the "34 Act"). 15 tf.5,(', 78,i,3,
4. Venue is proper in this district pursuant to § 2 2 of t ie 33 Act, § 27 of the 34 Act,
and 28 U.S.C. § 1391{b).
5. In connection with the acts alleged in this Complaint, rtofcnd arits, directly or
indirectly, used the iiieariti m i d instrumentalities of interstate commerce including [he mail, the
iit teaiu:t, Ielephone communications and the facilities olnational securities snarl cls,
PAR l'IES
A. PLAINTIFFS
6, Alexandra H. Ballard and R. Brinckerhof Lowery, Trustees u}f the Alexandra
IIix on Ballard Trust, arc individuals residing in Kul iah, New York and F3ositPII., Mais,whIse( ts
respectively. Upon the closing of the AMP/Tyco Merger, the mist r-rceived ?4_it1)4 Alit adjusted
shares of ['yco.
7. Dylan H- Hixnn , Trustee of the Alexandra Trust under the 1C'I [ [.t:x -[rust is an
irulivicimil residing at 100 West 80`h St. Apt . OF, New York, NY 1002-1. Upon tlic closing of the
AMI'i'I'yco Merger, the trust received 18 , 208 split - adjusted shares eat-'Tyco.
x- Dylan 11 . Hixon, Trustee of the Alexandra'!'rust under the JM I-I [.c±,, 't'rust is ,in
individual residing; at 100 West 80 'h St. Apt. YE, Now York, NY 10024. 1 [puss flit closing ol'liic
A.MP/Tyco M erger, the trust received 6 5 split-adjusted shares of I vLo,
9. Dylan 11. Nixon, Trustee of the Dylan Trri, under the [Cl I I ex Trust is an
individual residing at 100 West 80"' St. Apt. OF, New York, NY 10024. Upon the closing of the
Ai'GIPI'I'yco Merger, the tnist received 18,208 sp] it-adjusted shares ofTyco -
10. Dylan 1H. Hixon, Trustee o f the Dyian 'c'rust under the J M f•I l ,ex Trust is an
individual residing at 100 West SO"' St. Apt. 9E, New York, NY 10024. Upon the closing of the
AMII/Tyco Merger, the trust received 50,864 split-adjusted shares oI'Tycu.
11. Dylan H. Ilixon, Trustee of the India'1'rast under the ICH I.cx `Trust is an
individual residing at 100 West 80LH St. Apt, 9E, New York, NY 10024. lJliiuii the closing el' the
AMPfl yco Merger, the trust received 12,418 split-acij,usted shares of'fyco.
12 l-lylarr 11. H1xoiii, Trustee of the India Trust under the JMI-f Lex Ti wit is all
individual residing at 100 West 80°i St. Apt, 9E., New York, NY 10024- lfpo } the closing ul'thc
AMMP1'I-vco Merger, the trust received 47,382 split-adjusted shares of Tyco-
]I. Dylan H. Hixon, Trustee of the Shanti '['rust under the ICI I l.ex 'I rust is an
individual residing at 100 West 8Oth St. Apt. 9E, New York, NY 10024. Upon IIle. closing of Ile
AN1R,Tyco Merger, the trust received l 2e410 split-adjusted shares of Tyco.
14. Dylan H. f lixon, 'T'rustee of the Shanti Trust under the.IMI-I I 'I rust is an
individual residing at 100 West 80th St, Apt. 9E, New York, NY 10(124 1Jpoi1 111c elosin , ot-the
LMR/Tyr:u Merger, tlru trust received 12,418 split-adjusted shares ot-Tyco.
15, Andre,.v R. IIixon,'['rustee c fil i e IC'1`[ Ant h) Tr-r st is an indi iiIuial EesidiI ig iii
Pacific Palisades , CA g0272. Upon the closing of'the .AMPITyco Merger, the trust received
1 1 .907 split-adjusted shares of"I'yco.
11 LJ
16. Andrew R. Hixon, Trustee of the J M I I Ando 'T'rust is an individu al residing in
1'acilic Palisades, CA 90272. IIpon the closing of'the AMP/Tycn Merrgnr, the trust i-eceiveri
146,708 spiit-adjusted shares ofTyco.
17, Andrew R. Hixon and Michele M. Hixoii, 't'rustees of the Andrew and Michele
[ [ixon 2001 Trust are individurils residing iii PaciIJc PaIisades , CA 90272. Upon the closing of
the AMP/Tyco Merger, the trust received 165,824 split-adjusted shales a1"l'yco.
1K Debra P. Geiger, Trustee of the.. Debra P, Geiger Living 'l ruse 1s all individual
residing in Santa Barbara, California. Upon the closing of the AMP./'1'ycu Mer the it ust
received 25,810 sp] it-adjusted shares cif Tvco-
1 Q. Devon Geiger Nielsen, Trustee of-the Devon Geiger Nielsen I .iving't-rusf is all
inrlivi ual residing in Santa Barbara, California. Upon the closing uf'ti c ANIV, I yeo :Merger, the
trust received 40,534 split-adjusted shares of'lyco.
20. Dylan 11. Nixon and R. Brinkerhoff Lowcery, Trustees ni the Dylall Flixon 1999
Trust, ale individuals residing in New York. New York arid Boston, Massachusetts respectively.
Upson thy: closing of the. AMP II'yco Merger, the trust received 24,413 shared of-Tyco.
71. Betsy Hunter Geiger, Teti stce of the Elizabeth 1-1, H U11101. 1 rust I1Iv.o Betsy H.
Geiger, is an individual residing in Pasadena, California. Upon the closiiiE=, nl thy: AMP''1'y-co
Merger, the trust received 202 96 1 split -adju seed s, ire-, of - I yco.
22. Frank Hixon Foster, Trustee of the Frank 1 limn Foster I Q r7r) 1 rust, i5 an
individual residing in Santa Barhaf:i. Calilinrniti. Uprnn the closing o1'di .\M•ll'f'I yen ^vler;s r, tI e
trust received 84,718' split-adjusted shares of Tyco.
6
0 E
23. Betsy Hunter Geiger, Trustee of the Frank P. Nixon Trust f/hio Hctsy Ii. Geiger.
is an individual residing in Pasadena , California. Upon the closing of th u AMFVFycn Merger, the
tru5L received 44,287 split-adjusted shares of Tyco.
24. India T. Radtar and R. Brickcrot'f Lowery, Trustees of the loWa I. Radlar Trust
dated May 11, 19178, are individuals residing in F3earsviilc , New York and Boston' Massucliusetts
respectively. Upon the closing of the AMPT1'yeo Merger, the trust received 34,010split-adjusted
shares of `l yco.
25. William Dodd Geiger III, Trustee of the William Dodd (wiger Ill 1989 Revocable
Trust dated June 30, 1989 , is an individual residing in Santa Barbara, Cralitoniin. IJpun the
c- lnsing o f Ilse AMP/Tyco Merger, the trust received 76,746 split-adjusted shares ofTyco.
26. Barbara hunter Foster , Trustee ot'the Foster Family Trust A i>: an individual
residing, in Santa Barbara , California. Upon the closing of the ANIP/'i'ye+o Mer een'. the trust
received 73, 181 split-adjusted shares of Tyco.
27. Pauline H. 'I ui-pin, Trustee of the Frank P. Hixon "Trust 17h/u Pauline 1-1. T1urpii7 is
iur inciiviclual residing; in Loss Angeles, C'alilarnia. Upon the closing of the AN4111'I ycu Mcreer,
the trust received 112 , 404 split-adjusted shares of Tyco.
28. 1'allllrue 11. 1 urpin, Trustee of the Elizabeth 1 tixon F-luilterTrust 1; b/O Pauline t-1.
'i'urj)ill , is an individual residing in Los Angeles, Californian. [1pon the el osiiig, i,! the AM1'!'I yco
Merger, the trust received 113,3 9 S sp] iI -adjusted s haires of'i yen.
29. George B. Turpin, Trustee of the George B. acid Pauline 11. 'l urpirn 'rust, i an
inciivi diiul residing in Los Angeles, C'alifoinia. Upon the closing of the ANIP,"I }'co Merger, the
crust received 360,1 cab split-adjusted shares of Tyco,
e 7
30. Paul H. Turpin, Trustee of the'1'urpin Family 1992 Revocable Trust elated
December lb, 1992, is an individual residing in Los Angeles, California. Upon the dosing ol'the
AM P 'l'ycn Merger, the trust received 26,464 split-adjusted shares of rI -ycrn.
31. George B. 1'urpin, Jr., Trustee of the George B. Turpin, Jr. Living Trust dated
August 29, 1995, is an individual residing in Los Angeles, Calithi-nia. U pon the closing ot'the
AMP./Tyco Merger, the trust received 12,942 split-adjusted shares of Tyco.
32. Brier Allebrand. Trustee of the A] lebrand living Trust doled Aped 10, 1993, i,s an
individual residing in Los Angeles, California. Upon the closing of the AMP/ I'yeo Mcrgcr, the
trust received 6.202 split-adjusted shares of Tyco.
33. Betsy limiter Geiger, Trustee cal'the Geiger Family 1 neabic Fi-iNt, is an
individual residing in Pasadena, Ca Iitirrnia- Upon the closing ot'Ilie AM1':"I'vcu Merger, the trust
received 210,352 split-adjusted shares of Tyco.
34. Barbara Hunter Foster, Trustee of the Elizabeth t-I. bunter Trust fib/u Barbara
Hunter Foster, is an individual residing in Santa Barbara, Califirnrin. Upon the closing cif the
AMP/Tyco Merger, the truss received 717,920 tiplit-adlusled shares ol'Tyco,
35- Barbara Hunter Foster, Trustee of the Frank ['. ]Iixon "frost 1 h/u }3at'bara I-luntcr
E'n.,tcr, is an individual residing in Santa Barbara , CaliI rriia. Upon the closing ut'tlie AMP./Tyco
Merger, the trust received 2 28.676 split - adjusted shares of Tyco.
36. Adelaide F. Foster is an individual residing in Bu,.einan , \IUEiI,inr3. Upon die
closiiig of the AMPTI yc:o Merger, AtIcl , iide E. Foster receiv ed 1 15,24? split-adjusted shares of
Tyco.
r
37, E. Gage Fostr Woodard is an individual residin ^ in LailIYrtes, Colorado. 1-1pon^
the closing of the AMPI'1'yco Merger, E. Gage Foster Woodard received 116.irt7+] split-adjusted
shares o l't'yco,
38. Hugh K. Foster, Jr. is an individual living in C olchcster, Veniiont- [Ton the
closing of the AMl1rryco Merger, I lugh K. Foster, Jr. received 11 11s,9 13 spin-adjusted shares Of
Tyco.
39. Jennifer B.F.F. Walton is an individual living in Sti7w Ve nion . Upon the Closing
of the AMP/Tyco Merger, Jennifer B.F.F. Walton received 128,06`? shares ot'!'ycet.
4fl Andrew R. Hixon, Trustee elf the Andrew R. Nixon Titist, is af] individual
residing in Pacific Palisades, California. Upon the closing ut'the AMP/Tyco Merger, the trust
received 13;08t] split-adjusted shares cif Tyco.
41, Sltanti Nixon, 'Trustee ui the Slianti 1-11 xeit Revocable Ti ust is an individual
residing in New York, N•cw York. Upon the closing of the AMPTyco Merger, the trust received
34,[}14 split-adjusted shares of"[ yro"
B. TYCO DEFENDANTS
12. Defendant Tyco is a Bermuda corporation wit 1i a piincipal [dace of busiiiess in
New York, New York and holds itself out as a diversified manufacturing and services company.
43. Defendant 1_. Dennis Kozlowski was Tyco's Chairman and Chief Ex ecut i vo
Oii cer throughout the relevant period until June 3, 2001.
44. Defendant Mark 11. Swartz was Tyco's f .xe.cutiVe Vice-President :]nd Chi dl
Financial Officer during the relevant period until Sepleiliber 2002.
^ '7
E
45, Defendant Mark A. Belniek was Tyco's Executive Vice- P1csidenI and Chief
Corporate Counsel throughout the relevant period until June 12, 2002,
46. Defendant Frank E. Walsh, Jr. was a director of Tyco tiuougliuui ddie relev ant.
lien icxl until Fehrutiry 2002, when he did not stand for re-election to the board.
47. Defendant Michael A. Ashcroft was at all relevant times a -['yen director until
February 2002, when he did not stand for re-election to the Board.
48. Defendants L. Dennis Kozlowski, Mark 11. Swartz, Mark A. 13e1 unck, Frank F.
Walsh, J r. and Michael A. Ash crofl (the "Individual Defendants") were at all relevant times
controlling persons of Tyco as defined in Section 15 oFthe 33 Act and Section 20(a) of the. 34
Act. The Individual Defendants, because of their positions with the Coinpunnyt l assessed the
power and authority to control the contents of Tyco 's publicly filed financial ICII ti s, press
releases and presentations to securities analysts, i.e., the ii a kel. '€'hc 1ndivk luaI I )c#endants,
were provided with copies of the Coimrpany's rell{}rts alleged herein to he misleading € fior Lo 0r
till 1rily alter the issuance of these reports and had the ability and opporttiuitti to prevent their
ksuanee or cause therm to be corrected,
-19. As officers , directors and controlling persons of a publicly hull ctilllp any whose,
conini stock was, and is, registered with the SEC, funded On Ilse New York Stuck Exchange,
and governed by the pnuvisinn1, iif'the, federal securities Iaws, the Individual 1)e(enchiiits cacti had
a sli](y to promptly disseminate accurate and truthful iiiIhrmation with respect to the Company's
financial condition and performance, growth, operations, financial statements, business,
earnings, management, and present and future business plk)s l)CCts, ; I I I d 14r I 11! L 'cl ally prt viously
issued statcuients that luniil hec3nte materially misleading or untrue. sn that the nMtrket price of
y 10
0
the Company's publicly-traded securities would he based upon truthful ,and accul ate intiyrmation,
The Individual Defendants' misrepresentations and omissions violated these ^peeific
requirements and obligations,
50. It is appropriate to treat the Individual Defendants as a group fir pleading
purposes under the federal sec urities laws and the Federal Rules of Civil Procedure ;slid 1o
presunie that the false and mislead iit- information complained of hcreii r wa disssentinatcd
through the collective actions of a]1 defendants." The Individual Defendants Were involved in
ciratii:ig, prochicing, reviewing, approving and/or disseminating the materially 1"i Ise and
misleading statements and information alleged herein (including SEC filiings, press releases and
rnher pub] ications), were aware of or recklessly disregarded the f ict tliat materially 1liIse or
misleading statements were being issued regarding; the Company, and nonetheless approved or
ratil1cd these statements in violation of than federal securities laws.
C. DEIrENDANT PRICI:WATERHOUSLCOO1 ERS
51. Defendant PricewaterhouseCoopers (-NvC"y, is a Delaware liiimited liahility
partnership which is headquartered in New York City, acted as Tyco 's purporler]l _y ii depcndont
outside auditor at all i elevant tunes . During the relev ant per] od, PwC: [ti) audited Tyco's
financial statements; (h) issued materially false and misleading opinion s on those financial
staterltents; Ic) consented to the use of its unqualified opinions in Tyco's IpuhlicL), flied financial
statements.
BACKGROUND
52- Tyco provides a wide range of prcxlucts and Servicos to «}Irswnel s. From
through 2002, under the direction of its then CFO, Knrlowski, Ty;:n pursued a strategy cal
li
L4 E
aggressive acquisition which cost the Company more than $40 billion. C iirciugl1r)ut that pcrind,,
Tyco and the I ndividual Defendants proclaimed Tyco 's success as a "turn-around specialist,"
Iliait is, ^r company that dramatically improved the performance of the entities it ;acquired.
AMP ,IO er er
53, On November 22, 1998, Tyco reached an agreement Ui nicrgci with AMP, an
international manutacturcr of electronic connectors. At that tine, Plaiiili its hold a substantial
nuinnher of AMP shares- Pursuant to the merger agreement, each AM 11 shareho14ler would
receive .7839 of'a share of Tyco per share of AMP. On February 12, 1 cl01E3, ANI P and Tveo
distributed a joint AMPITyeo Proxy Statement and Prospectus (the'"AMI'rTy^.:o Proxy")
soliciting shareholder votes in support of the merger , 'Fie AMP/Tycu Pr-oxy included financial
data concerning both AMP and 'l'yeu and attached as yin terl1ihit the 11 merger agreem enat.
.54- In its public announcemcrnl of the merger, Tyco predicted that the AMP1'1'yeo
Merger would result in double-digit earnings growth and an "I mmediate Iuositivc carnin s
contribution." Moreover, in meetings with securities analysts, Kozlowski ckiiiiicri dial 'l'ycr3's
AMP 1ue[1L1isition would add twelve cents ])es share Icy Tyco's profits tug- Elie fiscal year ending
September 3f1, 1999.
55. On January 29, 1999, pr!or to the closing ofthe merger, AM l' announced its
financial results for the quarterly period ending December 31. 1998. Altlzrmugh A MP's nperat its ;
iiicc7uic had increased froiii the prior quarter, the emunpany reported a fiat loss ol'$79 million a5 a
result of: (u) $ 154 million in charges related to A M I " s "Prs>lit Improvem e nt 1'l.in"; (h) $17
million iii expensos related to its cleiense against a hostile takeover hid; and (c) $1 5 million in
non-rci'undahle bank lees related to AMP's canceled offer to repurchase 311 million shares ciits
12
F1L 0
own stock . The AMP Prufit Impiuvement Plan also established an accorunting reserve
purportedly for anticipated expenses 11-on7 workforce reduetioiis , thciliIy cl<<'irit; s, rlivestitw-es,
anti fixed asset adjustments.
56. On March 20, 1999, AMP riled its furor to-K {annual report) covering fiscal year
I90t . In that 10-K. AMP reported a total oF$376.7 millions in charges. intcluiling a reserve of
$240.9 million purportedly related to the anticipated discharge at'6,1151) cmplc sees and a 5126.8
million reserve tier the consolidation and closure of various facilitics. AMP also: reported ^a one-
ti time charge of$38A million in reserves for inventory an rI equipment writ; -clown„ inclucled in
the cost of sales.
57. In a press release i45ued Just two days prior to the closing, '1 y co again promised
double-digit growth after tie AMIPITyeti Merger- Following shareholder approval, the merger of
ANTI' and Tyco closed on April }, 1999,
58. On July 20, 1499, Tyco iS Lied a press release announcing Shat its earnings for the
quarter ending June 30, 1999 had increased 71 ",•% and touted the sales growth drat the Company
claimed was the result of the AMP acquisition.
59. In July 1990, Kozlowski and Ashcroft. and in Septenihcr and October 19900,
Kn/li nwski and Belnick, sold hundreds of thousands of shires of l yco at prices- nulling from
S40 18 to S51.50 per share.
I^]r]1) -2000 F irst rl ccuSat iu us 0f Acc9un ti fIQ jYr0 n1 kti ng 1Id.:1 U( S V;-V01-0USI ) LIIIUIy
60 [}ii Octoher 13, 1999, David 'ti'p'- Tice, n fund m,3nagei. puhlislwnl an a i title in his
ne%vsletter which questioned Tyco's accounting pninlices, sped fle,illy'l'yrn's a]lc ^:^l use Of
13
n .J I-L-1
"cookie jar" reserves to artificially boost earnings . Tyco vigorously denied ]'ice's asserlions in
press releases , interviews by Kozlowski and calls with securities analysts.
61. On October 29, ]')99 , the NFw YOR[C Trs.ii:5 published an article ranti ng '1 yen's
reputation as a turn-around specialist and the fact that AMP and other acquired companies look
large losses just prior to their acquisitions . The N F w YORK TIMES article argued that those p re-
merger loss charges explained why'fyco appeared to take no-growth cunnipames and show
positive results immediately after the merger.
62. 'T'hereafter, the Tyco Defendants embarked on a concerted carup,tign to cover up
their accounting frauds and Tyco vigorously denied any wrongdoing, or that it improperly
influenced its acquisition targets' pre-merger accounting in Ardor to cieatc tie illusion of post,
merger performance improvements.
6 3. On December 9, 19()(), TWO issLied a press release anno uncing tl ]<it Its accou nting
practices were under investigation by the SF C, specifically itS practices in Crinneetion with
reserves and charges taken during acquisitions. In that press release, and in Subsequent public
statelriurrts, the. Tyco Defendants emphatically denied any wrongdoing.
64. On June 26, 2000, Tyco issued a revised Form 10-k for 1099 aril] revised I urnis
10-0 for the first two quarters offiscal 199 and fiscal 2 000. The restated 1i.7^]it 10-K
reclassified certain charges and adjusted merger, restructuring, and other Iton-recurring charges.
Among other things, Tyeo reclassified $ 172-5 1nillioii of charges incorrect by AMP pries- Ill its
merger with Tyco, rcclassilicd 1127.5 million of inventory-rel a ted restructuring i:IfstS. and
c lirllinated S26 million of merger restructuring and other non-reeurrine charges which were
originally recorded in fiscal 1990 1)espite the restatement of it, tinuinci;iI results, the Tyco
14
0 LnJ
Defendants continued to deny that there were any materially false statements in the prior- 10-K
and 10-Qs or other fillings and denied any scheme to use spring loading to iiiflalc ]xt-
acquisition results.
65. On July 13, 2000, the SFiC informcAi Tyau (h-,ii it had completed its invesligatiun
and that no enforcement action would be taken.
2002 - New Accusations of Accounting Wrongdoing:yeo Admits Impropriety and Restates Financial . Reports
66. The conclusio n of the SEC"s first investigation of Tyco . couple d with Tyco'-,- mull
vigoro us denials , quieted speculation concerning the Company's accounting G)rdeticc5 firr nearly
one and a half years. I1owever , beginning in January 2002. a series rrt rep c:laIiutts t.oncernin
looting by some of Tyco's top exec htives (as described below ) ultim,itcly leis it new information
about accounting misconduct at Tyco , and the 1-evelatiuil dual Tyco had preViutLly concealed
material intonnation about its financial statements avid SE(' filings.
67. Specifically; new rcvelatinns about the abuse, by various Tyco- executives of tiro
Conipany's compensation programs as well ass Kuilowski's gales tax ind ctinerit led to
Kozlowski's resignation and resignatiilris ul'irt}ler executives accused of-wiongiluing..New
mauagcrnent then commenced it Iprclgrirn of internal audits and operating rev ie~.w5. the initial
results cfthese reviews and audits were relluricrl in Tyco 's SeptenIher 17., 2t]02, Forni K-K (the
"September Report") and its December 30, 7{)C)7, n-K (the --December Rvport'-1- I-hosc reports
disclosed new facts concerning accounting Inlpiupiiclics th at occurred hct'Ore the AM P merger -
and thus were rellected in false and iliis]c aliinj SEC filings before and in connection with the
merger - and continued through .Jr1nn 7002.
i5
r -1L -A 0
69. Significantly , Tyco admitted in the December Report that during the first SEC
investigation (December 1999 through July 2000) Tyco failed to produce "['[I large quantity of
documents ... in connection with the SEC's document request ." Thus, the i'yco I.)cfendains
allirmativcly concealed evidence of their accounting improprieties and their material
nIisrepresentations in public disclosures.
69, In June 2002, the SEC re-opened its investigation of Tyco. In that revived
inquiry, the SEC investigated whether Tyco prevailed upon acquisition target companies to de1cr
revenues in order to make acquisitions appear successful. The SIE( .' also began Investigating
-Tyco's public reporting of executive compensation and its use o! reserves to boost earnings.
70. '1'hc SEC's second investigation and Tyco's own internal audits in 2002 and 2003,
levcaled numerous mateiial misrepiesentaticns iii Tyco's public III[a] cial duculrlrnts as well as
manipulation of acquisition targets to help inflate post-nieiger earnings. Murcuvei, those
investigations, as well as the criminal proceedings against lhrmcr"!'yeti ni inzu eiiient, revealed
extensive looting of - corporate hands by Tyco executives.
fending Two Fraud Cases
New York Criminal Case
71. On September 12, 2002, a New York grand jury indicted Ko lowski and sworn.
Phc indictments charge the two men with looting the Company of more th.ul 561)0 million by
using more than S 1 70 million o! Company' fluids or their own purposes and icapingillore 111uuii
5-1311 111111ion in impro per pro its front the sale of I yco stock. Both mc11 pleaded not guilty. On
the same day, the gravid jury indicted Mark Bclilick, l'veo s 1oriuer getlcral eutiimael, charging
hint with i'alsifying business records.
t
16
-'LJ
72. Swartz and Kozlowski's trial started oar September 29, 2003, ijt New York State
Supreme Court is Manhattan. The prosecution's case is still ongoing as oftlhv, date of this
Complaint- Thus far, the prosecution has introduced evidence showing that Kol.lnnwsk1 and
Swartz:
n took loans finnt Tyco's Key F.mployce i.nrtn Program ("K [I." t li l)urpotic5 tftut
authorized by that program;
n took loans from Tyco's Relocation loan Program lire' purl)ON- 1101
authorized by that program;
• used corporate funds for personal purposes, including the purcimse ol'real estate,
personal property, investment in a sports franchise, and lavish entertainnient; and
• ordered the payment of funds to themselves, or forgave debt that tlie.y owed to theCompany.
SE( Case Against , Swartz, and Belnick
73. On September 1`2), 2002, the SEC tiled a civil complailit agailist Kozlowski,
Swartz, and Belnick in the United States District Court for the Southern 1)ixtrict of'Newv York.
Securities Exchange Curran L siura i^. Iio;Iva ski, No. 02 C'iv. 73 12. As OF the dais: OF this
Coinplaain t, the case Iias berm stayed pending conclusion of the erimii1a1 caste against 1< oz. iow.,;ki
isnd Swartf_
SEC Case Against Walsh
74. On 17, 2002, tlhe SEC filed and settled -- en ne tiL ll a:-Nainst lurinner
Tyco director Frank E. Walsh , Jr. Sceurities and Lxclwuge Commission r'. Fra n kk I Jl 'culsh,
(S.l].N.Y. No. 02-CV 0t)21). The case alleged that Wul,h misled [yen i,ovestuis when he failed
to disclose a secret $20 million "finders fee" paid to him by'l'yc o in cklilnceuun With [lie C'I'i'
merger. W'aish"s settleilient with if le SEC bars hire ruin e ver serving un the bourn cola publicly
traded company, and requires that he pay 570 millimi in restitution.
v/
0r -IL-J
SEC Administrative Proceeding Against Scalco
75. On August 12, 2003, the SEC imposed sanctions on Richard P. Scal-rn, the f'wC
partner in charge of Tyco audits for 1997 through 2001. The SEC charged that Scalzo did not
pcriurm the audits in accordance with Generally Accepted Audit Stand ards eend shat, if he had. he
would have discovered and disclosed much of the fill Lid at Tyco. The ardmim sti ativo order harred
Scilzo from practicing hefore the SEC.
1.
TYCO DF.FEND.ANTS' WRONCDOINC:MATERIAL FALSE STATEMENTS AND OMISSIONS
CONCERNING TYCO'S ACQUISITION SLCCESS AND EA RNINCS
A. Material Misstateme n ts Prior Io AMP Merger
76, Prior to and in connection with the AM{' merger, Tyco and the Individual
Det'endants (collectively referred to as the "Tycn Defendants") engaged in a scheme to:
(a) artilicially inflate !'yews carvings; (b) mislead investors as to the sow-ce cki 'i }cu s positive
earnings, falsely portraying Tyco's profits as the result oforganic growth and ZWN [ion
sy'1]ergics.
77 For exauiple, Tyco's I O-Q for the period ending March ; 1 , 199 (' 3131 /08
10-0"} signed by Swartz, stated:
Operating pwfiits k r the. f)isposuhlc and Specialty Products "ro^up
increased 36.4% ... principally due to higher sales and inc reased
margins including the effect of the acquisition of Sherwood-Davis
Geck fur one nion tlr in the cluaarter._^"
79. Yet as Tyco has since admitted in its December Report, at the rime the 3/31!98
l0-0 issued, the C'ornpany was engaged in "aggressive accounting; that was i,3Iended .. , to
ilicreasc current earnings above what they would have been if a more consers :Lti vee acct unting
1;S
0 0
approach had been followed." in fact , the accounting was more than "ingressive," it vita.
fraudulent.
79. As the Decenlber Report further explained . "priu3 nianugelneiit [of Tyco]
appeared to influence the management of an acquisition target into adopting accounting
treatments that `over-accrued' expenses prior to all acyuisi1ion's t:oll sun lii lad on car otherwise
execeded what was permitted by GAAP." Thus, the'1'yco Dcfcndanls' scliem e, as evidenced by
the admissions in the December Report, was to inflate post-mimerger earnings by causing the
merger target to inflate pro-merger josses.
80. In addition to spring-loaning, prior to Tyco's merger with AN P, the Tyco
DeIendailts also inflated earnings by improper classification of pre-tax charges. On June €6.
2003, Tyco announced that as a result of the second SOOC investigation, it would restate financial
reSLi Its to correct $606.1 million previously classified its pre-tax charges. A\cCorLling to the press
release announcing the intended restatemcutt5, tiled with the SEC as a EiOrm t;-K, _jtjhe charges
sulrject to the restateniciit irx:Iude priii ariIy pre-tax charges cif $434.5 million ... rcevrded in lie
(it arter coded March 31, 2003 Cur items related to prior periods and pre-tax chru-gus of S 261.(P
million recorded in the quarter ended December 3 1, 2001.-'
81. On July 29, 2003, 1'ycn Iiled the promised restateineuts it): a 1'uim I t.l-K/'A lirr the
IFiscal Year ending September 30, 2002 (the `- ?002 lO-KjA-'), a Form 10-Q/A lily the (Iuarter
eiuiing December 31, 2002, and a Fo1-nr l0-Q/A 1br the. quaff ter ending N1atc:h 31, 21003 (the "IL11 v
0111 1Zestatements "). As the Tyco Defendants explained in the 2002 10-K/A:
Intensified internal audits and detailed operating reviews . , . have lid usto test a te our consolidated financial statements, fir the q uarle€5 LathedMakh 31, 2003 and December 31, 2002, and for the fiscal years Leaded
.September 20, 21)02, 2001, 2(0)0, 1999 an d 1948
19
The restatement principally relates to (i) recording cliarues in the prior
years and quarters to which they relate, rather than in the period such
charges were initially identified, (ii) a revision in the method of
amortization used to allocate the costs of contracts acquired through our
A DT dealer.
82. Although the July 2003 Restatenients were made in filings (hated after the AM1'
n1ergcr, they altered reported earnings as i'ur back as 19<98. As the press, release announcing the
July '003 Restatements explained.
The effects of the restatement of these charges will be to reduce theCompany's reported results for fiscal years 1998-2001 and to increase thereported results for fiscal 2002 and the first six months of fiscal 2003.
Thus, by issuing the July 2003 Restatements, i yco admitted its reported results t.n fiscal year
1998 were inflated overall.
93. As set forth above, Tyco's 3/31 /98 10-Q claimed a 36.-111%'„ increase in profits in
part due to the Tyco's merger with Shef wood-Davis just one II101nth hehrre. I iIli ) II iutorn Iatiui)
and belief that was a material misstatement which tailed to disclose Tyc:o'.s use of sprirl lrradirtg
and stated falsely inflated earnings figures.
84. Similarly, Tyco' s 10-Q tur [he pcriud eiidiug June 3 0, NON ("6i]0/9# 10-(1- ),
signed by Swartz, stated:
Operating profits for the Disposable and Specialty Products (,mil
increased ... 77..5°/, ... principally due to increased volume ... inclLiding
the effect of the acquisition of Sherwood.
Operating profits for the Electrical and Electronic Components group
increased ... 164% ... principally due to the acquisition of A I'& F'ssubmarine systems business in July 1997 .. ,
As with the 3/31'9# I O-Q, those staten-Tr-nts were materially misleacIiFig hcct use they rifled to
disclose Tyco's use oI'spring-loathng and stated IaIse] y inflated profit 1i ;ores,
20
0 0
85. On December 10 , 1998, Tyco issued its annual report, Morin I O -K, for the fiscaI
year ending September 30, 1998 (the "1998 10-1("), signed by each ol'the 1ndividuai Dcfirndants,
Tvco's 1998 14-K stated that:
Operating profits of the Disposable Specialty Products group increased
$52A million to $328.7 million in Fiscal 1997, or 191,1•'0, reflecting higher
enniings at Kendall, including improved tnanufacturiiig efficiencies and
the earnings of I> BRAND, Tyco Plastics, which in addition toy iiile:fiat
growth in volume and prices, include- Ibc ievults q/ Carlisle ftoln
Scptr'mher 1996---
(emphasis added).
86. Yet, as Tyco admitted in its December Report, the Company intlated the results of
the Carlisle Plastics merger through accounting manipulations. -1 he Decembeer Report dcscrlhed
a n iiiteniii I Tyco ]IIemo, dated September- 10, 199 6 , which instructed Tyctr m;utaigers on how Icy
use "Financial engiii^ering" to artificially improve the results of the Carl isle Plastic,, merger. As
the December Report explained:
[t]lie mneino and attachments define 'firnancial engineering' as `prc-tnerger
entries' and `purchase accounting' items ,is 'post-merger cntrics. A
'Discussion Items' attachment states 'we'll hook additional 'Financialengineering' reserves in July with the objective of having a break even
month The balance of the reserves will he honked in AufausL.' .. .
the detailed schedule [attached to the ineinoj demonstrates that theoverwhelming portion of the financial engineering will he its the molithjust prior to the consummation of the merger.
87. Thus, Tyco's 1998 10-K was materially misleading by falsely attributing the
iuereascd profits to improved perforrrianee and by failing to disclose Tyco's use at'
loading to inflate Carlisle Plastic's results. The Tyco Deiciulants eithc-E l,ne% in were reck}es^ in
n o1 knowing that the statement in the 1998 1 O-K was talsi- amid miyleadin , U]iii iiunittcd iui. tcriak
III t )nil Lit] oil.
21
2
88, In addition to its misrepresentations concerning Carlisle III asties, Tyco's 1098
I 0-K misled irivestois in its statement of operating results generally; ptuvitling luflared figures
and falsely attributing increased) income to real growth and the synergies ii-n111 acquisitions
#9, For example , in its 19 18 10-K, Tyco reported income ( before extraordinary
expenses ) in the amount of S 1.18 billion, reflecting an iricicase of 70.2%, claiming "N 11c
increase was attributable to margin improvements, increased sales and resiilts ot'acquired
companies in each of the Company's business segments." The Uec:emher Report admitted,
however, that Tyco caused acquisition targets to adopt accounting treattuents designed to detlale
earnings prior to their mergers with Tyco. As a result, and contrary to the stiitenments in tiic 1998
10-K, post-merger earnings increases were not wholly the result ot'perforniauice. Tyco restated
results as tin hack as 1998, decreasing reported earnings, rendering the 7(i.2' fi^iure inaccurate.
As the Tyco Defendants either knew, or were icekless i,t not kiiowii^ .: thosw statemiiermts were
materially false and misleading and omitted material iitfiirination.
90. Tyco's 10-Q for the period ending December 31, 109h C'12/3 I MS 1 it-Q), signed
by Swartz, also was t'raudlulent , stating:
[Excluding non-recurring charges] income hcfiare extraordinary item
rose 51,5% to 401.6 million, or $.61 per diluted shays fir Me quarterended beccniher 31, 1998. . , (t)ho increase was attributable toincreased sales. margin improvements and results of acquiredcompanies in each of the Company's business segments.
As the Tyco Defendants either kniew, or were reckless in not knowing, those -,tutcmeiits were
false and misleading and omitted material iiilbrmatiun, for the reasons set 1'k)0h above.
22
0
91, The 12/3 1/9 8 1O-Q was also misleading with respect to the merger with US
Suq*,ieal on October 1, 1998. Tyco admitted in the December Report that US Surgica l's prc-
merLtcr results were deliberately manipulated to improve Tyco 's post - iii erger earn iii ;s.
92 As the December Report explained, on September 18, 1998: 'i'yc(u gave- a
presentation to its managers concerning the l18 Surgical merger. (The prescr11 itio1i itself ]iris not
been made public .) According to the December Repnit, in the presenta tion, "l ycu claimed the
Company could recogni z e $72 million from "Financial en inecring" of the L1S Suig ical merger-.
the December Report further described an August 17, P)98, memdrandum to 'l yco managers
which set forth methods for achieving earnings goals fir US Surgical, ` inc [u^iiu glans to `over-
accrue expenses in Q3 before closing' and `accrue in advance rebates."'
93. Consistent with those fraudulent strategies, in she month be:t6rc lire merger, [IS
Surgical accrued $18.7 million for potential legal lees related to on-going patt•nl defenses and
other items. Two admitted in the December Report that this expense was an irrsrrrnce whetc
' priosrmanagement appeared to influence the management of an acquisition [ergot into adopting
accounting treatments that `over-accrued' expense prior to am aecl{risiti oil' s ei}11 au rrmation.'
['he .$18.7 million figure was subsequently reduced by lycq to $500.UUU
94 Tyco's I 7/31/98 1 O-Q included the false and manipulated linuuicial dam of I S
Surgical, including. the grossly inflated charge for legal secs, and ailed to disclose the inaccuracy
ut'tlrese numbers and Tyco' s role in creating them . As the' I'yco l]clcndants either knew, or
Wel L' reckless in urot kitowirig, those statements were tal se and in Is Iead 111 t^ and utititted material
iri6 nnrati011.
23
0 0
95. Moreover, in the 199 8 1 O-K and indeed every major SEC tiling in 1999 through
April 1999, Tyco set firth its business "strategy" as toliows:
Tyco's strategy is to he the low-cost, high quality producer and provider iit
each of its 1noorkets. It prulnates its leadership position by investiLsb ill
existing businesses, developing new inarkets and acquiring
cempkenientary businesses and products. Combining the strengths of its
existing operations quid its business acyuisitioliy, 'l'yeo seeks to enhance
shareholder value through increased earnings per share and strung, casli
flows.
That purported strategy statement was materially false and misleading in that it portrayed Tyco s
V'owth as Ilse result. ulacqui itiun synergies. In fact, the "growth" consisted of "I itaneia]
engineering" designed to artificially inflate results. The Tyco Defendants either knew, or were
reckIcc,s in nut knowing, IIiat this slalenlent was false and niislcad Iii ig and oiiIittcil IIiaterial
information.
96. The Tyco Defendants' scheme to inflate earnings through ^kccuruIll i119
manipulations continued into 1999. In the crucial statements filed in early 1 t)99. just prior to the
shareholder vote uiI the A MP/Tyco Merger, Tyco falsely reported higher eanliiigs through
improved performance and tailed to disclose its use of spring-loading.
B. Material Misstatements in the AMPITyco Proxy
97 On February 10, 1999, AMP and Tyco i,asrfed the AMP/Tyco Prey, signed by
Koorlowski, soliciting shareholder approval of'the planned merger. The AM P/Tyeo Proxy
i.iicluded material misrepresentations corncerning Tyco s inflated earning;; including the 1998 10-
K results which were incorporated by reference. The AM1'/Tyco Proxy Statement also
iricor stinted the ceI'll hilied results nt'(he 0 Ober 19 )8 1-1. S. Surgica1 Merger - a mergger wI11cIi, as
i
24
the December Report explained , was spec.iticaliy targeted by the'l'yeo Defendants tils'`l'inuneial
engineering."
98. Thus , thr example , the AMP/Tyco Proxy stated:
Earnings at Tyco's Ifealthcare and Specialty Products group increased
74% ... [s]ynergics and cost savings associated with the integration of US
Surgical and of Graphic Controls Corporation which was acquired in she
fiscal 1999 first quarter, contributed to higher operating margins for the
group in this quarter.
ThcTyco Defendants either knew, or were reckless in not knowing, that this statelnent was false
and misleading and omitted material irttormation,
99. Moreover, the AMP[Fyco Proxy incorporated AM P's linaulcial results for the
1997 and 1998 , including the $186-0 million in "restructuring and other oiie time charges," 11lal
AMPincurred in the quarter ending December 1998. The AMP/Tyco f'rax ' de eriptions n1
I-mrrmerger charges were false and misleading;, as Tyco has itself arlmittcd by rerit;i1ii ig a imrnlrer
cri'them. Specifically, on June 2'6, 2000,Tyco Iilcd a revised 1O-K for the fiscal year running
Ocloher 1, 1998 through September 30, 1999 (the "9'39/90 10-'./A") iii which the C'ompai ly
admitted the Treed to reclassify certain charges and to adjust merger , rest r aIul ink, a and other lion
recurring charges with respect to the AMID merger. The 9/30199 1O-K/r\ also included a reversal
of $16- 9 million of mcrger , restruc turing and other non -rcculi ing char-e s whiUll were omigiitully
1'ccOn1ed in fiscal 1997 related primarily to facility closings and lease Ec nhiina Icon costs.
100. Thus, in the AMP/Tyco Proxy, the Tyco f)c1orldants asserted both sides of the
tiering.-ioalciilrg equation - inflated post-merger results for LI5 Surgical and ilii laiLli pr'e-merger
losses 11 11 AMP 'the Tyco Defendants either knew or were reckless in clot knowing Ilium those
stak:meltts were false.. and misleading and omitted material irildrlnation
'c
E
101, Shortly after Tyco and AMP issued the.. AMP Tyco Proxy, 'C'yr_u tiled its Quarterly
Report for the quarter ending December 31, [998 (the-12/31/9S 1 O-Q"), signed by Swar t ,
which again claimed positive earnings based upon improved performance anti sueccssful
acquisitions:
Excluding - - - non-recurring charges, income before extraordillary Itemsrose 51.5% . . . for the quarter ended December 3 1. 199t . . . . The
increase was attributable to increased sales, margin improvements andresults of acquired companies in each of the Company's hu:Jriecs
segments.
As the Tyco Defendants knew, ar were reckless in not knowing, those stii tell tot it s flllsely inflated
results and failed to disclose the spring-loading and other accounting 111,11111)Lulutluuti used by
Tyco.
102. The Tyco Defendants ' misstatemen t s aruleeming post--ackl ii,i [ uxi earnings were
pailicularly.signiflcanl to Plaintiffs . - [yen's reputation, at the time, was a turn - around SpecialtA.
This reputation was falsely supported by'1'yco' s inflated post- ac([ uisition ear!h u gs puhliei-ed
pricer to the merger. In the first nine inrul[lls of I91}l3 alone,']. yen acquired businesses tur [ n
aggregate cost of $3.42 billion and consistently reported increased pro lit,. 1'lai11tittti 1'ehed upon
Tyco's reputation and the purportedly accurate financial data behind it in deciding to vote in
favor of the AMPITyen Mer[tcr, which was , at the lime, 'l'yL'0's largest acqui s ition to date.
103. Indeed, in its November 23, 1998 press rcleirse anriounr:int the AMP merger,
Tyco, promised significant post-merger growth, in tine with Tyco's pi trc. hike, lii.sto ry ref
success. As then CEO Kozlowski stated: "[t.Jhc combination with Tyco pr,vidlcs AMP a clear
path t n becoming the luwcst cost Irianu1acturer , while providing attractive rrlurgiit mlproven]erll
resulting in double-digit canmigs growth and strong cash tluws tor the lnrcscL-able future." In
-16
rIL
that press release , AMP's Chairman cited Tyco's track record of growth through acquisitions as
the basis for his expectation of positive results from the merger.
C. Material Misstatements After the AMP Merger
104. Tyco's material misstatements remained uncorrected for' nearly three years
following the AMP merger. Moreover, from 1991) through 2002, the I yco Deticsiafants continued
to proclaim the "positive" or "accretive" results al' its many acquisitions, f ilsely perpetuating
Tyco's reputation as a turn-around specialist and inducing t'laintifts to relaii Ilheir stack.
105. On July 20, 1999, just three months aicr the AMP merger, l'yc o issued a press
release, which was also filed with the SEC as a form 8-K, to announce, among other things, a
7 1%`(, increase in earnings per share. The press release explained that the results included
-contributions from they AMP and US Surgical merger,. As Knrlowski expl, iinctl in the
ilrr^r}urmeement.
With strong contributions to higher caniings from each of our t[}ur
business segments, Tyco produced another record quarter and anliripates a
record year . . We continue to benefit from strnhlg urge} }ic revenue
growth and margin expansion enhanced by the integration of synergistic
:aeyudsitiuns,
As the Tyco Defendants knew, or were reckless iii not knowing., those sUitcriictit , IitIsely
attributed itp p arently higher earnings to organic revenue growth and l;iiled to disclose I yCOO'S LISe
of spring-loading.
106. On or about September 77, 1999, Tyco filed a proxy stateinerit ti,s- the re-election
3
of the Board of Directors anal consideration cif various shareholder piopo--,afs. Attluehed to rheet
prosy was Tyco'-, 1998 Annual Report to Shareholders (the'1 99^ Annual Report"y which, like
the 1998 10 K and other prior filings , provided a i ii ;ll rmihin C}Ver i ^v c t l ycv} '.: upcralic^n5:
Income before extraordinary items and cumulative et'lbct Of accounting
changes rose 14.8 °'% ... for fiscal 19118...ItJhe increase was attrihutahle
27
F-- -1L.J 0
to margin improvements, increased sales and results of acquired
companies in each of the Company's business segments.
107. Moreover , pursuant to Tyco's use of the pooling of interests method of merger
accounting, pre- merger financial data, including the falsely inflated Iosscs 1'}i both AMP t nd US
Surgical, were included in parts of the Consolidated Financial Statements and Notes annexed to
the 1998 A nnual Report. As the 1998 Annual Rcliort states:
During the fourth quarter of Fiscal 1998, [US Surgical] recorded CL°rtin
charges of $80.5 million. These charges include $709.9 million ol'costs to
exit certain businesses. ... in addition, me.l ger costs of $9.6r Inillinmi were
recorded that represent legal and insurance costs related to the merge-.l-consummated in the first quarter of Fiscal 1990.
During the fourth quarter of Fiscal 1998, AMP recorded charges of $185.8
million associated with its Profit Improvement Plan . . , [t]hese charges
include the cost of staff reductions of $172.1 million . . . and heconsolidation ofcertain facilities of $ 13.7 million ...
Be Tyco Defendants either knew; or were reckless in not knowing , that those statements when
madc were materially lilac and misleading and omitted material information.
108. On September 29, 199.9, Plaintiffs' representatives attended a i'ycu presentation
to investors and analysts. During the presentation, Kozlowski reported ",3 hiliiu E in revrenue
and promised revenue growth at a rate Of 1 1 to 12 percent per year without acgkiisitiOns.
Ko/Innwski attributed strong growth in Tyco's Telecom and 1;1ectromiicc segnlclit (w111ch includes
A'Y111) to the effects of Internet growth and further elan Iled reductum oh over $800 1m ilioII in
costs at AMP, with an increase in sales as well. As the Tyco Detkndants knew 0l' should have
known, those statements when made were materially false Iind misleading aiii omitted material
illlurmation by failing to reveal the role of spring-loading itl inflating earning; amid AMP post-
n ] e 1-.;C r lie r! L) rIn an C:e.
28
r Il_J 1]
109. On December 13, 1999, Tyco filed its 10 K tar fiscal year ended Septevibur 30,
1999 (the "1999 10-IC"), signed by Swartz, Kozlowski, Ashc.ioft, and Walsh. As with Tycu's
filings prior to [lie AMP Merger, the 1999 10-K contained material ntisstuten'ents and olttissiuris.
For example the 1999 I [J -K states:
In Fiscal 199'), the Company consummated two mergers that were
accounted for under the pooling of interests method of accounting. Hiemerger with United States Surgical Corporation closed on October 1, 19')9,
and the rnerger with AMP Incorporated closed on April 2, 1990 . .. The
Company recorded as expenses during Fiscal 109'1 costs directly a ssociated
with the USSC and AMP mergers and the costs of terminating employees
and closing or consolidating facilities as a result of the mergers. TheCompany also expensed in Fiscal 1999 the costs of staff reductions Lind
facility closings that AMP undertook as part of a plan to improve its
profitability unrelated to the Company ' s merger with AMP. In Fiscal
1998, the Company expensed charges for staff' reductions and facdily
closings under the AMP profit improvement plan and charges that t )SSC
incurred to exit certain of its businesses.
As Ill is statement exemplifies, Tycn'S use of the pooling Iii' interests nlethsxl If iuicrger
accounting resulted in Two incorpnrirting the acquired company's historii: result.,, including; Itic
Ia1.Lly inflated pre-merger losses . Thus, the 1999 1[1-K provided fitlse Inth7ri11atlrln eoilcel'niilg
charges and rnerger expenses and finiled to disclose the Tyco Defendants' us< <) f'tiprinb-1tiutliI1g,
As the Tyco Defendants either knew or were reckless in not knowing, those s:tateaii ents wlrcrt
made were materially false and misleading and omitted material infonnatI011.
110. Indeed, Tyco admitted in its December Report that in the case o C A^Mf l': "tlle
recorded quarterly results for AMI1 show a decline in profits prior to the acytllsal on by Tycu and
ali Increase Al profits following the acgquisi(ion .'' SinliInrly, the Ducclltbur Retort said cat ItS
SLIPgic-,d- "Surgical's reported results also dcclilrcdi cueing the quarter immediately prior to tlw
rnct ,cr, as coirlpared with quarters prior lu and atlcr the cunsunuilation a ] the merger,"
2y
14
Acucord.liiig to the Dec.eniber Report, the accounting treainlent leading to those ltrLi lt post-merger6
results was:
not neutral as to the timing of [lie recognition of revenue s and expenses . .
for example [Tyco devoted considerably l css attention to idc+ltifying
appropriate accounting adjustments that would reduce reported [earllints
in the period immediately after an acquisition than it des. uted to
identifying appropriate accounting, adjustments that would increase
reported earnings after an acquisition.
I 11. The 1999 10-K also gave favorable, pul-11ortedly accurate information concerning
Tyco's operating results . The operating data, however, failed to disclose 111e Financial
ongincering and other manipulations dest : ribed shove ( and acknowledged by Tyco in the
December Report ), but instead attributed Tyco's positive results to "organic g rowth" and
"synergies ' resultirig fro,n 'Tyco's acquisitions. According to the 1999 100 K:
Operating profits improved in all Segments . . The oilperatingimprovements are the result of both increased revenues and enllanccd
margins. Increased revenues result fi-zxn organic growth and tiolmm
acquisitions that are accounted for under the purchase method ofaccounting.
112. Similarly, with respect to the AMP and US Surgical mergers, tine 1-)99 10-K
stated: `.Ehjy integrating merged companies with the ('bmpany's existing busintrs.^es, the
Company expects to realize operating synergics and Io 1mg-term cost saving ' Tyco filrther
reported profits in the electrical business as follows:
The 40.5% increase in operating profits in Fiscal 1999 compared with
Fiscal 1998 was due to improved margins at AMP, the acquisition ul
Raychem, and higher sales volume at TSSL and (lie Two 1'rilmtcd Circuit
Group. The improved operating margins in Fiscal 191)9 compared wit11
Fiscal 1998 were primarily due to the Implemc.milatiolr of As1I' ', plaint
improvement plan, which was initiated in the thus th quarler nl Fiscal
1998, cost reductinn program,, associated with the AMP merger, 11
pension curtailmentlsrttlement gain and the acquisitions of Raychem... .
These improvements were partially ofTset by $253.4 million of curtain
costs in Fiscal 1999 at AMP prior to the ntciger• with Tyco, iiic:Iumlillg
30
0 CJ
costs to defend the A€liedSignal Inc. tender offer, the write-oil ofinventory and other balance sheet write-offs and adjustments.
111 As the Tyco Defendants either knew, or were reckless in not knowing, those
statements when made were materially false and Inis!e:nling and omitted material ititbrmation.
Indeed, Tyco ultimately restated its results in the 1999 10-K. On .tune 26, -1000. Tyco tiled it
revised annual report for the fiscal year ended September 30, 1999 (tlie "LO/3(1/9 1 10 lain'-), in
its public Statement CLaIleCI 111lig Iliese change s, Tyco explained that it made the revisions in
response to a' lim1tcd review" by the SEC con cci-nillke "tho e port iorls of l yco'. t.lnatlcial
statements principally relating to charges and reserves reported iii eoiiiicclitiln with Tycois
acquisition activity."
114 As Tyco further explained in connection with the 9,130/99 10 K/A:
;['he amendment to the financial slalerlicnls is being filed to rcclassif}'certain charges and to adjust merger, restructuring and oilier turn-recurringcharges betw een periods due to the timing of the uiiderlyisin, Lcvenls asCailows:
- To reclassify $172.5 million of charges, 1ncui i ell by AMP prior toits merger with Tyco, related to the wllte-utI [lI goodwihl and fixed
assets of exited husinesses in the Consolidated Statement of
Operations out of the --merger, restructuring and other non-recurring charges" line and into the "charge for the impail•11mL•lrt oflong-lived assets" line;
- To reclassify $27.5 million ol'inventoiy lehlled resIr-i u liirlnt! cos is,in the Consolidated Statement of Oi r, ii oils oiit of the li^Lrp r,restructuring and uthei iulrl-recllrring charges" line and into the"cost of sales" lirle;
- To eliminate $26.01 million of merger, restructuring and other nor-recurring charges which were arigiriully recorded il; fiscal 191c14)
related primarily to severance and facility closings and thesubsequent reversal ofsuch charge rccorded as a credit to merge!,restructuring and other non-rceun-ing (cmedlits) c:limiigcs I:ikacn in tfiefirst quarter of fiscal 2000;
31
L__J n
- To record a credit in fiscal 1999 for [lie revcrsal of S16.9 million
of merger , restructuring and other non-iecurrin ; charges which
were originally recorded in fiscal 1997 related primarily to facility
closings and lease tennination costs (this credit wris previously
recorded in the first quarter of fiscal 2000);
- To report certain non-recurring costs related to the integration of
the USSC suture business originally recorded in the first quarter of
fiscal 1499 as costs in later periods when such activity was
completed (deferring $1 1.1 million of trud der, iestruettii111g and
other non-recuiTing charges o iginally recorded in fiscal 199 until
fiscal 2000); and
- To update various disclosures primarily related to lpurch J'.c
accounting liabilities and merger, restructuring and other nrlrt-
recurring charges.
1 15, On March 14, 2000, Tyco issued its 1999 Annual Report to Shareholders [the
"1999 Annual Report"). The 1999 Annual Report staled that "wc have E;rowr1 our earnings at a
.35% compounded rate for the past five. years-" As the 'I yco Defendants either knew or were
reckless iii not knowing, thus stateiitent was niaterialIy Hulse and mislead 31Eg and on liLted nlalerial
information for the reasons set forth above.
116. The 1999 Annual 1 epnrt also inr.ludcrl a letter lium KL1-IOwtikI tip TYC(i
shareholders, which stated:
Fiscal 1999 was an excellent year fin Tyco Intertratinirial. \'c
exceeded our corporate goals and continued to build on our recurring;
revenue base and forge strong partnerships with our customers. We also
acquired many fine companies that will provide an iinnlediatc boost tin our
already strong profit and cash flow and become an additional som-ce id
sustainable growth well into the future.
For the sixth consecutive year, we increased revenues and erriliings
substantially. Revenues rose 18 percent to $22.5 billion and eanlJogs grey
$1.15 billion to $2.56 billion, an 82 percent increase over the prior vco^:r.
Fiscal 2000, which began fur 'l yccr en October 1, 1999, is till to arood start. We expect sales to exceed $26 Nihon and ice cash flow- -an
32
important measure of our underlying business l)crfbrwance -- to nearly
double, from $1-7 billion to over $3.0 billian-
We aim for sustained earnings growth in excess of 20 percent,
powered by increased revenues and niargiu expansion. We achieve this hy:
the elin}ination of overhead and burdensome bureaucracy; ecununmics of
scale; a relentless focus on costs, productivity improvements and quality;
and an increase in growth in the higher-margin service components of I)ur-
business .. .
[W]e will keep executing the same strategy that has brought us this
fair. We will continue to use our strong balance Shect and powerful cash
flow to invest in our operations and to make strategic a.ccfLI,ItiorlS tar
improve our product line as well as our bottom line .. We think we can
double our earnings over the next three years.
As the Tyco Defendants either knew , or were reckless in not knowing , those statements when
Iniadc werc materially false and inisleariing and omitted nt^ateria] inlorrnati+m.
1 17. The Annual Report also attached Tyco' s consolidated tln:rnci a t stalen}ents tirr•
1908. As the July 1- 003 Rcstatetnei ] ts revealedl , however, these year end-results reported inflated
eaniings and omitted certain A DT charges.
118- On Janu ary 70. 2(100, Tyco i ssued its form 9-K a1111ounc:i}111 that diluled earlli,igs
per .share for the first quarter of fisca12000 (ending f eeceuber t 1, 1090), increased 49 percent
over the previous year. In the attached press rele,ise. Kca..lowski stiate& ^t Jr,^a31ic: growth across
each Of our tour business segments and all I;eu graphles drove Tyco's lserliurmanco in the first
quarter.... Free cash flow was iniproved as well. 'i llc .strcr}gth erl t ur u01-c hutii}^csses L:oluIhil}cxi
}
with strong Cash flows are indicative 01' urnither strong your iUr`l'yctr,' - As thi:'I yco l)eti.z ulant,
33
E.
either knew, or were reckless in not knowing, those statements when ,nude wete materially Use
and misleading and omitted material information-
119. On February 11, 2000, Tyco tiled the Coin Ipany's Form 10-Q for the, quarter
ended December 31, 1999 (the "12/31/99 10-Q"), si , led byS^v^irir. III it, fhe I Yeo Deirmlants
made minicrous materially false and misleading statements, as later shown by the restatement of
Tyco operating results in a June 26, 2000 10- Q/A #i}r the same period (discussed below). For
example , the 12/31/99 10-Q stated:
Operating income improved in all segments in the quailt'r ended
December 31, 1999 as compared to the quarter ended December .t 1, V)') 8.The operating improvements are the result of both increased revenues ,tndenhanced margins. Increased revenues resulted from organic growtli a o ldfroiu acquisitions.
Thoic statements are materially fitlse and ntisleariing because they thiled to riisclI)sc how the
fraudulent accounting described above (and admitted by Fyco in the December Report), inflaled
ea^n]ings, and falsely attributed the positive results to synergies ti om t'wo's .,Cg UonttUIls.
120. The 121'3 1/913 1 0--Q also gave materially false and nmisluading intiwnttttion
megalcfitigl yco's reserves:
I n the quarter ended 17ecninhcr :i I , 1909, the Company established
restructuring and other 114u1-recurring reserves oI-514.4 million primarily
related to the exiting of USSUs interventional ctiudiology husiIIV,;,' al id the
restructuring of ANiP's BraziIian operations. At Sep tern her -i0, 19111!, there
existed merger, restructuring and other non-recurring meser^, es X11' $453.3
million. During the quarter ended December 31, 1999, the Company pail
out $58-3 million in cash and Inclined $$19.17 million in noii-cash cll,ar_,es
that were charged against these reserves. Also in the quarter etidled
Dccenlber 31, 1990, the Company deteiinit]ed that S131.O ntillit±il of
merger, restructuring and other non-recurring reserves ostabhished in prior
years was not needed and recorded a credit to the merger, restructuring
and other non recurring charges Iine item in the C't nsoIidated .Slate !guilt ctrl
Operations. The changes in estimates Of the restructuring plot at AMP
were atl.rihulahlc primarily to increased dc:ntand for certain of \MI' S
products which Wfis not anticipated at the time Of the merger and to recent
34
acquisitions such as Siemens IC. Therefore, the Company has deterrnihled
not to close several facilities and not to termin a te approximately 1,0(1[1
employees, whose costs were provided for in previous AMP restructuring
plans. In addition , certain restructuring activities at AMP were coinpleted
for amounts lower than originally anticipated. the changes its estimates of
the Company ' s 1991 restructuring plans and the USSC restnicturing p lanes
were due priinatily to the completion of activities for amounts lowem tllair
originally recorded,
As described above, time Tyco Defendants engaged in a scheme to aiiifciully ii r11,3te earnings
post-merger by pressuring and providing incentives for the acquired company to take large prc-
merger charges, which Tyco subsequently reversed. I ipon inhmnnation amid holict, the above-
cited reversals of AMP's pre-merger charges were part of that scheme. Titus, t110 statements
were materially misleading and failed to reveal that the reversals were not recent discoveries
based on business reality, huf rather, fi>>ancial engineering, intended from the, hcuinnimig to create
lzo:sitiv'e post-merger earnings.
121. As the Tyco Dd. ndants either knew, or were reck less in not Lziw ink;, the ubovc-•
I described statements in the 12/31/99 10 Q were materially false and misleading and omiiitlcd
material infonnation . Indeed , the 10 C2 results were s ubsequent ly restated by 1'ycn. 01i tulle 20,
2000, Tyco issued a revised I O-Q for the period , the 1''!31 /99 I {l-Q/A, which restated the results
as tullows!
'T'he amendment to the financial statements herein is being fil(^•d to
reclassify certain Charges and to adjust merger, restructuringind hitter
non-recurring charges b .twecrr periods due to the ti niii ig ul'the underlying
events as 1-allows:
- To reclassify $65.6 million of charges, incurred by AM I' during
the quarter ended December 31; 19915 pricer to its merger with
Tyco, related to the writc-ut]'o(good wIII and fixed assets al exiled
businesses in the Cansolidatcd Statements of Operations out of the
"merger, restructuring and other non-recur irng (c.redlts) clcu cs,
net" line and into the "charge for the impain-ineilt o t l n ,-li'ed
assets" line,
35
0 0
To eliminate $26.0 million of m erger, restructuring and other
tiion-recurring credits recorded to merger, restructuniig and other
non-recurring (credits) charges in the first quarter of fiscal 2000related to charges which were origltially recorded in liseal 119q9
related primarily to severance and li-tcility closings;
- To reverse a $16.9 million credit previously recorded iii the
quarter ended December 31, 1999, related to merger, rest nicturilie,
and other non-recurring charges which were originally recorded infiscal 1997 related primarily to facility closings and le;rse
termination costs, and to reco#'il $3.0 million of that credit in the
quarter ended December 31, 1998;
To reclassify $15.0 million of- nventory related restructuringcosts, incurred during the quarter ended December 31; 1998, in Zhu
Consolidated Statements of Operations out of the "merger,
restructuring and other non-recurring (cre(lits) charges. net" lineand into the "cost of sales" line,;
- To report certain non-recurring costs related to ilie-integratiorn O fthe IJSSC simire business originally rec-itided i n the first quarter offiscal 1990 as costs in later periods when such ,activity was,completed (reversing a (;22.3 million charge in the quarter endedDccc-mher 31, 1998 and recording $7.7 million tif that charge illthe quarter ended December 31,1999); and
- To update various disclosures primarily related to the shoveadjustments.
122. On April 18, 2000, Tyc n held i conference during; which Korlow,ki also
emphasized the Culnpany' s positive earnings.
KOZLOWSKI:
...we're very pleased with our quarter, with the strong outlook kkc have
goingforward ... our organic growth tier the company his been some 10`„
that our earnings are up some 47,a and then the prospects and irutlutik lbr
a very strung cash flow.
As the Tyco Defendants either knew, or Wc.re reckless in not knowing, this statement
v,'as itiaterially i'alse aril misleading and omitted material intirmatinrr.
36
123. Tyco's IO-K for the fiscal year ended September 30, 2000 (the "2 000 I 0-K'").
signed by Swartz, Kozlowski, Ashcroft, and Walsh, continued 1 yco's In actin: of falsely inflating
results and otnittin2, 11ialc°r-ial irnlormation- For example, as wit}t prior filings, 'l yco set lurth the
16llawing strategy statement:
Tyco's strategy is to be the low -cast, high quality producer and provic der i neach of our markets. We promote our leadership position by investing inexisting businesses, developing new markets and acquiringcompleiiienlary businesses and products. Combining the strengths of ourexisting operations and our husiriess acquisitions, we seek tc: enhance.shareholder value through increased earnirrgs per share and strong casliflows.
As the Tyco Defendants either knew, or were reckless in not knowing, this statement when iriMile
was materially false and misleading and omitted material information for the reasons set fhrth
above.
124. The 2000 1(1-K also gave !'avorable, purportedly aecutatc infirrrn,i^icsr;^c :{^nierniti
Tyco's operating results:
Operating income improved in all segments in each of Fiscal 00t) andFiscal 1999. The rrprriling improvements are the result of both increasedrevenues in all segments and enh ariceel margirns in all but one segment iiiFiscal 2000. Increased revenues result firma uigrinic growth and ion)
acquisitions that arc accounted for under the purchase c l;n Sd o lIaccounting.
125. The 2000 10-K further provided: "[h] y integrating merged companies witlI our
exist lug fii ii 5505 we expect to realize operating synergies and long-terns cost savings." With
respect to profits in Tyco's electrical husitwcss, the Tycu Defendants stated:
The 49.6% increase in operating income, hclCrre certain credits (uh,arge^),in Fiscal 19 9 9 compared with Fiscal 199S was due to improved Eiiart_,ins atAMP, the acquisition of Raychem, and higher sales volume at the FvcoPrinted Circuit Group. The improved operating margins, belisre certaincredits (charges), iii Fiscal 1O99 compared with Fiscal 19ot wereprimarily due to the inmplenicirtaiic n of AMP'S prolit improvement plan,which was initialed in the fourth quarter of Fiscal 199X, cost reduction
37
0 E
a
programs associated with the AMP merger, a pension
eurtailrrieut/settlemcnt gain and the acquisition of Raychem.
As the Tyco Defendants either knew, or were reek less in no 1 . knowing, those Statements when
made were inaterial iy false and misleading in that they presented inflated resuIt', and omitted
material infonnation concerning spring-loading and othei accounting manilputalioIls.
126. In 2000, Tyco also issued a number of misleading press statertment•s concerning its
earnings. For example , in a May 7, 2 000 press release . 'fyeo dcscribc ci the ac quisitions of
Thomas &. Betts Electronic OEM as follows:
This acquisition offers significant cost saving opportunities through
manufacturing synergies, rationalization of R&D and efficiencies throughcombined product marketing , distribution and purchasing ... the addition
of this business would provide an immediate positive contribution to
Tyco's earnings.
127. On June 'fi, 2000,'1 yet) issued a press release announcing the acquisition ol'
NU I I in Arodt, with a headline claiming "Acquisition Will [ lave Eminedi,3te l'usiI n'•e Inipaci on
Earnings - .." and further staling:
The Mallinckrodt acquisition ... offL.rs consuiidation 01)pO1'tLlriitie5 as Well
as significant manufacturing, purchasing and distribution synergies. ( lurpast acquisitions in Tyco Flealthc:are have achieved strong tarp ling. k;r- ;nthand operating efficiencies- We expect that the acquisition of M, llinckn tli
also will provide ongoing positive benefits to Tyco sharehulelcr:,.
128. On January 30, 2001, Tyco i9-sued its 2000 Annual Report to Shareholders (t lie
`2I10th Annual Report"), which misleadingly asserted that its '`exceptional linirneial results' are
the product of'its "growth-on-growth" strategy;
Tyeo has cletnonslrited thc ability to grow e,3 eh of its busiitcssc t11 aliicaIly,
as well as by the acquisition Of complenrentary busitnesses or produc t limes.This '`growth-on-growth" strategy has yielded exceptional finariciol resLilts
hmr scverat years, and puts us in a positions to achieve excellent growth iri thefuture.
38
0 rJi
129. The 2000 Annual Report also touted Tyco' s purported ability to acquire
companies that "immediately" add to' earnings:
Acquisitions are a definite growth driver at Tyco. The second pail of the
growth-on-growth strategy involves acquisitions that add new products and
businesses to complement our core groups. We seek to acquire companies
with superior products that have long-tent] growth potential but areperforming below peak level, or companies that. fill a gap in slur existing
product lines. All acquisitions must immediately add to earnings, but they
must also make strategic sense by helping us become a stronger competitor
in one of our existing business segments. Buying at a good price is
important; finding a company whose people and products fit well i ; our
organization is essential.
As the Tyco Defendants either knew , or were reckless in not knowing , those slatenierits when
made were materially false and misleading and omitted material inforniation.
130. The Annual Report also attached Tyco's consolidated linaiiei;I] statements for
1909. As the July 21)03 Restatements revealed, however, these year end -re5 ]its reporte€l inlluted
earnings and omitted certain AM charges.
111. Vehruarv 13, 2001 , Tyco issued its Font I O-Q for the quarter ended Deccinber
31. 2000 (tlie "12,9 1/00 1O-Q]"), signed by Swartz. In it, i'yco set forth I 111la ted tnlneratin g 1esults
and misrepresented the source of such earnings:
Operating income, be ore certain (charges) credits, improved in all
segments in the quarter ended December 31, 2000 as compared to tim
quarter ended December 31, 1999... "["he operati€,g, improvement,, ,ire the
result of both increased revenues and enhanced margins. literc,tsed
revenues result from organic.. growth and from acquisitions that are
accounted [Or under the purchase method of accounting.
'file subslau €tiul increase in operating income and margins, hefOre certain{charges) credits, in the quarter ended December 31, 000 c mpared withtlic quarter ended December 31, 1999 was clue to improved n,aru,iiis atboth AMP and Tyco Printed Circuit Lir€rup , and to a lesser extent. theacquisition of 4ielnens FC'
39
0 E
132. On May 11, 1001, Tyco issued its Forlu I0-Q for the (ILKI0e ended March 31,
?001 (the "3/31/01 1 O-Q") and on August 13, 2001, Tyco is sued its Form 1 t}-Q ltbr the quarter
ended June 30?U[)] (the `'613[)i0 ] I Q"), both signed by w lrli. in both quarterly statelnrents,
Tyco again mislead investors about the source of Tyco's positive earnings, slcltirng: "[i]ncreased
revenues result from organic growth and from acquisitions that are accounted tier under the
purchase method o f' accounting."
133. Thal st iiement was nratcrial]y 1i11se and a isleadiug 11ei,1use it trailed to disclose
the fraudulent accounting practices described above (and admitted by Tyco in the December
Report), but instead attributed the favorable results to synergies resultinu froin Tyco's
ar-gluisitiens. As the Tyco Defendants either knew, or were reckless in unit (knowing, those
statements when made were materially iiilse and iuiisleading rill(] omitted IIiaicria] infilnllelluni,
134. On December 28, 2001, Tyco tiled its 1 OK ihhr the fiscal year ending September
30, 200 1. Like the 1999, 1 )Q9 and 2000 10-Ks, the 2001 10-K made a In Isleading statement
concerning Tyco's strategy:
Tyco 's strategy is to be the low-cost, high quality producer and provider ill
each of our industrial markets , and through Tyco Capital, to provideinnovative financing and leasing solutions to independent eusinme: rs and ill
,11ppurt of oni industrial 51:guiuents. VV C lrrontote nar leadersllill €li.rsilion by
investing in existing businesses , developing new markets aiid acquiling
complementary businesses and products . Combining the Sirongths of our
existing operations and our business acyuisitieuiis , we seek to enhance
shareholder value through increased earnings per share and strong cash
flows.
As the Tyco DoIendants either knew, or were. reeldes in not knowing , that sI i&-anent when lriauIc
w is materially false and misleading and omitted material infbrniatiun I'Or the reasons set forth
above.
40
r11LJ J
135. In addition. as with other of Tyco's Filings in 2001, the 20I it-K misleadx
investors as to the source of Tyco's earnings and omitted InCoral atiotl concerning the ro]e ref
accounting manipnlatinn in these results:
Operating income ... improved in all segments in each of Fiscal 2001 andFiscal 2000. . . ^ t]he operating improvements are the result of hotli
increased revenues - , and enhanced margins .... Increased revenuesresulted from acquisitions that ate accounted fnr under the puicl1Ise
method of accounting and from organic growth.
136. In addition to SEC filings, a ]iumher ot'Tyco's press releases in 2081 perpetuated
Tyco 's unfounded reputation as a turn-around specialist by falsely claiming " post-
acquisition growth. For example, concerning the acquisition ot'Scott Teelut ilogics, Tyc;o's
February 5, 2001 press rclem.se stated:
Acquisition Will Have Immediate Positive Imp tai on 'f ycIS
l-arrtin S .. ,
According to L. Dennis Kozlowski, Tyco 's Chairinan and
Officer, This transaction will he imniedliately accretive to Tyco'searnings per share and will generate positive Operating cash llo« s . cell
Technologies , which is a leader in its markets . will add sin iitieiuit
recurring revenue to 'l'ycn Fire , Security Services.
137. Simil,iirly, Tyco's March 28, 2001, press release publicizing the ( onnpaiiv-s
selection as the "number one pertitrnming company of 2t)00 by F3tusinessW'eek ut.tgaLiue,,' "Iatcd.
Tyco's ' growth on growth- strategy has been designed to deliver ongoing
solid , sustainable organic growth coupled with grow [N thrcrnghh
acquisitions . Our strategy has positioned Tyco ; i s the: leader irn irimr n),i 1k, t:
and as the high-quality, low-cost producer in the industries in wliiil +y'e
operate."., . ]n addition , Tyco has made acid integrated more titwtii 114
acxquisitions , all U1' them accretive to sharwholriers.
1 ,18, On December 20, 2[1111, 1'ycn announced ;.iiiotlier accpiisitic n. ^i^itiir prf.,cla ini iiiti
its positive eartrings:
41
LJ C
Tyco International to Ac.yuirc McGrath RelitCorp, Accquisition F.Npands
Tyco Capital ' s Product Portfolio and Recurring Revenue Base;
I trunedi atel y Accretive to Tyco Earnin gs and Cash Flow
According to L. Dennis Kozlowski. . As is the case with all l'yco
acquisitions, the transaction will be immediately ac,.retivc to bulls 'yew's
earnings and cash flow.'
Tyco's practice of falsely attributing positive earnings to urguiiie growth
continued in 2002.
1311. Tyco' s practice of fa]sely attributing positive earnings to organic growth
continued iii 2002. On February 14, 2002, Tyco issued its Form 1 0-0 161'111C quarter ended
December 31, 2001 (the "12/3 1/01 1 O-Q"), signed by Swartz. In it, Tyco pros ides titvorable,
purp ortedly accurate intbrrrlation concerning '1 yews operating results , These fig ures are false
and misleading and omit material information . Indeed, as both the December Report and Tyco's
reslaterl I O-QIA tar the same yuarler (filled December .3 1, N)02) reflect, durimtq- Ilu! quarter ended
December 31, 2001, Tyco overstated its pre-tax income by more than 21" ,. ks the'1'yco
Defendants either knew, were reckless in rust knowing, those stalelnents rA hull m ade were
mataria1ly1 false alid inisIealliilg and onmiIted materi al in tbrniatiLill,
140. On May 15, 2002, Tyco filed its Form I O-Q for the quarter ended March 31, 2002
(the -1/ 3 l/02 10-Q"), signed by Swartz. In it. Tycri provided l usitiv4, prlr11u tedl4' accurate
information concerning Tyco's profits. As both the December R purl and restated 10-
/A for the same quarter (filed on December 31, 2002) reflect, this liliag uwhx,ia(cd Tyco's
repined loss by more than 71 %. Tycoi admitted that despite its own analysis which rauiclutleul a
goods will impairment charge for C•I'1' was necessary; the 0) tpany Fule:d1 ti timely reeoI'd this
1tiss.
4-1
E
I 1I. In addition to the inflated earnings data, as a result oi'Ehe liiiluic to pi ,ipet €y
account for diminished goodwill , the following are also material miss iateaterlts ill the 3/31!1)2
10-C) (as the Company etti-etively a(tmitterl):
The Company periodically reviews and evaluates its goodwill and idler
intangible assets for potential impairment. Effective October 1, 2001, the
beginning of Tyco 's fisca l year 2002, the Company adopted SFAS No.
142, "Goodwill and Other Intangible Assets ," under which goodwill Is no
longer amortized but instead is assessed for innpaitment al least annually.
Under the transition provisions of SFAS No . 142, there was no t'nodwill
impairment at October 1 , 2001. Updated valuat ions were aom1deied is ofMarch 31, 2002 for our Tyco Telecommunication,; (formerly fyCon1)reporting unit and Tyco Capital , which resulted in no itnlpairim:Ikl ingoodwill at that date.
However, during the quarter ended March 3 1, 2002, circiinjslanc es
developed that could potentially impair the value of g(mdwiil with respect
to our Tyco 't'elecommunications reporting unit and 'T'yco ('aipil;il.
Updated valuations were completed as of Maicl1 31, 2002, wwhicli retiuIt ecl
in no impairment of goodwill at that date.
1s the'i'yco Defendants either knew, or were reckless in not knowing, those statcinenis when
made were materially ialsc and misleading and omitted material inlorimmation
U. Tyco' s Consistent Denials of Accounting Wrongdoing
142. From 190) through approximately June 2002, the Tyco D 1en&lalit^ steadla.5tly
denied all allegations of accounting wrongdoing and iii fact engaged in ai coiw erted effort to
cover tip their wrongdoing. It was not unl.il after the resignation of Korluwsl,i iz Jutie2 102 and
the appointment of new management at Tyco, that Tyci finally adrnlitted it used aecuuiitiz v
tn,1111Jxulali0tIS to enh A l lce earning s. Tyco, S denial:, prior to June 211 02 were false :issuuranczti,
Lic5;ia,icd to mislead itiveStc^rs and further promote the Tyco Dclcndant5' scheme III oddilic n.
43
L- J
each public denial was itself a material misrepresentation adding to the numerous false
statements set forth in Parts A, B and C above.
143. As noted above, the first accusations of spring-loading were levied against'I'yco
in October 1999 news reports, The Tyco Defendants strongly refuted the claims in October 1999
in statements to the press and in a conference call with securities analysts. Fo}r u.sanlple, as
reported in the October 15, 1999 WALL STREF.T JOURNAL , in response to the 'I ice [Report, 'T'yco
released a statement describing Tice's allegations as false and malicious 'rumors." In a
conference call with analysts, which Plaintiffs' representatives attended, Tyco expnilded its
denial, rebutting Tice's charges specifically and stating:
There is no risk that investors will wake up one day and find out I that ^there's something wrong with the way we've been recording revenue Orthe way we've been recording nlargins ... [these asc] no restatuntents, noiITegu]aritics and no investigations .. .
144, Tlhe pub lii:ity surrouri1lirig Tyco's mn -counliiltj l ed the SF c to upon 1i1
1 n N a' Ligation, which '!'yco publicly revealed in a Deccmber 0, 1999 press i elomisc [ thed with the
SECS as a torn ) 8-K). In the release, the ryeo Defendants again denied :tits L roitgdoing:
In light of the recent market activity in oit r stock. whiell its trot jINI111ed
by any development at the conlpauuy, we Welcome the opportunity to
respond to [the SEC's] request. We remain Confident i11• our accountingmethodology, our public cli.selosures and the continuing strength Of out-business.'"
145. Duri rig- the course of the SEC" s first investigation , the Tyco l)cf'undants cou it Li tied
to likely reassure iltvestors that the Company's financial ml:itil was accurate uiid that it hall not
en,g gr:d in any acc'ounting', II11sCondLiuL For example, Ina January I8. ?t)titJ L'tiiiI reilec call,
1 ye() claimed 4 It at no accounting improprieties existed:
44
SWARTZ:
Since we disclosed last month, when llhe SEC irnibn11oll us' about
the informal inquiry being perfarined, we ended up making the
submissions as expected, beginning in January and will colttirnie to
provide the' information that's being requested by the SEC. What's
extremely important to realize though is that we have gone through this
information, reviewed the materials going back three yeears; wire at the
company remain very comfortable and confident that our accounting was
appropriate tor reserves as our auditors also remain confident with time
accounting that we perf«rined for those aciluisilions. We will cnlit.iulltc to
make the submissions as requested by the SEC and hove as quickly aspossible in providing it to them so that we can get this behind as.
146. On March 1, 2000, Tyco issued its 2000 Annual Report, in which the Company
reassured investors that there was no accounting wrongdoing:
As shareholders are aware, certain recent rumors and allegations, [v hick
we believe to be unfounded, have adversely ai tested l yco's stock price.
Shareholders are also aware. that the SEC is cmii ducting an inquiry rail that
shareholder lawsuits have been tiled against the Company ill urinous
courts across the country.... We continue to have complete col Iilkitec its
the senior management team and feel the fundamentals driviin, the
company have not changed. As indicated earlier, our philosophy is to
reward stellar perflrrmlances, which is what we did ihhr fiscal 1009.
As llit Tyco Defendants either knew, or were reckless in curt knowing, those :trrte.rnents when
mane were materially false and misleading and omitted material itiI'hrrnatiomi,
147. As explained above. on June 26, 20130, Tyco tiled a ieVisem.t aurumual reprint for the
fiscal year envied September _iil, 1999, as we] I as revised I O-Q, Iiw the yurruir:r ' cIIded f)tecemnber
31.. 1099 And the quarter elided Mauch 3 € , 2000 (the "June 2000 Rcstni1cnicntr "), In its public
statement concerning these changes, Tyco explained that the revisions ti ere murmdc in response to
a "limited review" by the SEC concerning "those portions nl''l yco s tiilriilcial st;tlt°IEtt:tits
principally rela[iuig to charges and reserves reported in connection witlr Tycr^'s .ictj ssitiini
45
r-9LJ 0
activity." Despite this restatement of ifs financial results, the Tyco 13efendia3its, continued to
deny any materially false statements in the prior 10-K and 10-Qs or other filings and deny any
schenre'to use financial engineering to inflate post-acquisition results.
148. Indeed, the June 2000 Restatements and Tyco's false rear:sucaiices succeeded in
caliiiiriu the market ' s fears about Tyco's accounting starting in July 2000, when the stock
rebounded and continuing for the next year and a Iialt: For example, on June '!,, 2000. IJBS
Warburg. issued an analyst report entitled , "•I'YC: SE C" Review -- Positive Outcome ... Overhang
Lifted-" The report stated:
Magnitude ol'SEC Accounting Requests Is Insignificant, in our view.
Management also expressed comfort with consensus estimates for tho
second quarter, $0.57, and 2000, 52.16 ... We remain extremely bullish on1'YC...
[WJe are. looking for $3.3 billion in free cash flow generation this fiscalyear, which along with the company's unlevered balance sheet, , tThrdample powder for acquisitions - implying our earnings estinrales ,LrCconservative.
• •f ycir's share price closed at $4869 on June 76, 200[1.
1.14. 011 June 27, 2000, "1'f1L 1VALL SFRFFTJOtURN AI_ reported (hat, w311i Ilie filuig ol'the
June 2000 Restatements , the SEC' s informal inquiry was cffectively pal to rest t' Tyco's Share-,
Rise 13°i, After Concern Restates Result,, Following SEC Review"). According to theYarticle,
analyst response was also favorable: "Michael 110110n, analyst at 1'. Row4C ['rice /lssociutes in
Raltimorc,.-. said the results of the inquiry `IMEit to rest any lurking fear.; about the ctrl 3paiiy's
a: c unting and the credibility of its management.' He called the an1uOuiuenrcnl `lx siti\ e it rliss
the hoard. "'
1511. As the news reports predicted , as a result ell the reslaten^c 311ti. in JLtly 2000 the
SEC closer its investigation without taking any enforcement acii^ri3. `I'he'l'ye ^) I) I[ ncfs3nt.5 ' tiilsi:
46
C C
reassurances had their intended effect - the market in its stock rebounded and the SEC dropped
its investigation. Tyco's success his Ied IOF Ilie ne xt year atId a half, until January 2002, when-
concern about Tyco's accounting practices resurfaced,
151. From January through June 2002, there were a series of tevelatiuns conceniing
corporate looting as well as renewed concern about accounting improprieties . During that time,
the €'yeo Defendants continued to deny wrongdoing.
152 For example, a January 16, 2002 article in T1 it WALL S t xf- t_ t PIt kNAt. reported:
Mr. Kozlowski said the enuipla Tly remains '`frustrated by continuing
negative rumors" regarding the company' s accounting . "There is nothing
negative going on at any place at Tyco," he said, inviting anyone with
questions about the company's accounting practices to "give us a call."
153. Similarly, a January 16, ?002 article in THE NEW YORK'I!Lm i_S reported:
Dennis Kozlowski, Tyco's chainnan, expressed frustration in a conterenoecall with analysis-yesterday morning that Tyco's accounting continue fube questioned. "Ou1 accuulitillg li i.s heen reviewed and iiiutld to fhe
sound," Nir. Kozlowski said. "Our disclosure is exceptionally Flelaile^f -"
Mr. Swartz, l'yco's chief financ ial officer, said Tyco Ibllows standardaccounting in its acquisitions and does not manipulate balance sheets.
154. In the January 2 9, 2002 edition of T1-if WALL 5tRt_1_:F.IU1 ^IRNA[., fyco revealed its
$ 2() million paymclit to wals11 1,01 11is role 1r1 IIie C IT merger deal. After that revelation, the price
of'l'yco's stock dropped 20%. The Tyco Defendants, however, continued to rlcfry airy
wrongdoing and to fraudulently assure investors that no accounting manipulation occurred. for
ex:ii ip1r:, ;lc :nrsling t1l Flit: WALL s rREET Jc }tiRN-AP.:
I,. Dennis Kozlowski , Tyco's chief executive, said in a statement that thepayment was "appropriate in light of Mr. Walsh ' s cfihrus." But Igor.Kozlowski added that -clearly we are in an environment where people areintensely skeptical of corporate America , and for that mutter, of Tyco.-Mr. Kozlowski has repeatedly defended the company's accounting asproper - He said he believes the sharp fall in "Tyco's stock price was
47
E L-J
"unjustified," adding that the company is moving forward in "high gear"with its plan to break itself into four pieces to create more shareholderVal ue.
155. In a February 6, 2002 conference call, TWO again attempted to qu a sh the revived
cum-erns about the Company's acquisition accounting:
SWARTZ:
On one other issue, the accounting questions that have been itskccl_ 1Jiil'urirtrial ely,buried in a New York 'l'imes article today, they do conic out and say that mrievidence of accounting irregularities have been found at Tyco. That is true, that isexactly what happened two years ado when these sane allegations were given,same exact argument,, and we were able to demonstrate two years ago that ouraccounting was sound, the results we were showing were appropriate, and thatwas eunlirrned by independent reviews both from the government and also fromindependent auditors. We rite in the same position today as fir as our approach toaccounting. It's on a conservative basis, ih i5 bill disclosure, second to none, andwe do know that as it result of the quest iolis being thrown out into themarketplace, in a current jittery market, that there are questiuiiti flint oral upcoming from just the allegations themselves. We understand that, we recognizethat, and we are, currently working on the best way to once again demuti,trtte thatthe accounting is sound and appropriate and we will put that on a public tiling inan S-K with SEC to he able to once again demonstrate to you that the a. countincontinues to be as sound as it was two years ago, a year ago and as included in our10-K and our 10-Q that will be coming, our, of frill disclosure.
156. In a February 13, ?002, eonlerenee call with analysts rl'yco siiiiilaaiy deiiied
genii3nting wrongdoing:
KOZLQWSKI:
I do want to remind you that we will he filing our Fiscal first yuarir:z- c}ii tornorrow. You'llsee even more disclosure than you are used to at Tyco. We already provide substantiallymore disclosure than peers. We believe this is a good thing. The more year knowabout nut acco luting, I believe the more cornt6rtahle you will hu.
SWARTZ:
We believed that us with all o t' our accounting that the best rlf}r^ r :re li I-Or us is to tallowthe most conservative that we can as fir as showing the finanuial strcn lli nl 111eornpany.
48
LJ Lt .1
As the Tyco Defendants either knew, or were reckless in not knowing , those statements when
made were materially false arid misleading and omitted material information.
157. Tyco continued to mislead and deceive investors iiI a series rrl'ccliilerence calls
from 1 ebruary 2002 through April 2002, in which the'i'yco Defendants denied the use of spring-
loading o r other accounting manipulations to inflate earnings . The Fyco Defendants also sought
to deceive investors through published news reports . For example , an aF tiele in the February 2,
2002 edition of the Roston Globe, entitled "CFO DEFENDS TYCC) P1 AN, r\(('() 1N-fiK-G"
reported:
Kozlowski sought to reassure investors at Tyco's annual sliareholiler
meeting here that, despite a wave of uncertainly that has baticiud the
company's stock in recent weeks, "Our accounting is conservative an id it isproper," He said Tyco had been unfairly sucked into the cyclone ui
concern around the collapse of Enron Corp-
158. Also in February 2002, •I•iIE NEW YORK I VY1 S reported Ihat, prior in the
acquisition, Tyco encourage(] Raychem to prepay some expenses, yet again €he "1'yer f)^ li ^,cl,uit:;
denied widespread use of spring- loadi
Tyco International said yesterday that it had enr: Buried Payt:heinn,an electronic components maker that it bought in 1909, to prepay sonic
expenses bofoie the acquisition was cuiripleted.
Tyco execurtiv<es have denied that Tyco changes the 11avnwiltpractices of companies it buys before the takeovers are final . Brad McGee,a st,okesinan fir Tyco, said yesterday that the prepavnicnis at Raychemwere standard business practices and did not contradict the company'searlier statements.
The disclosure about Raychem carte in response In yue:ttio+isabout a letter sent by a 1 rmcr Raychem crriployce to the Securities aiidExchange Commission . The letter outlined payments that Ruyehenl 1i3,«ic
at Tyco's behest before the acquisition closed. 'T'yco paid $3 billion lnrRaychem in August 1099..44', McGee .said East night that he had scot seenthe letter but that "some fornicr cmplovee.s did approach the S.1-.['. willsallegations ." Ile adileil that the S.E.('. had curciully reviewed Tyco'srtetions and had found no problems.
,t^-)
S
159. In a March 19, 2002, article in THE WALL 5 t-RFE.T JottRNAI, cntiticd "Tyco Inflated
Cash Flow Of Acquisition," Tyco's spokesman is quoted as stating that Tyco had never
"manipulated the cash flow or earnings of companies we acquire for the purpose of spring-
loading, or getting better results after the acquisition."
160. In an April 25, 2002 press release (filed with the SEC as an 8-K), the Tyco
Defendants announced negative financial results. An attached letter fron} Kozlowski stated;
We have always tried to be as transparent in our accounting ;ta
possible. Indeed, I consider our disclosure to be second to none arnong our
peer companies. That some in the media would compare us to companies
that may have intentionally misled investors through the use of financial
chicanery is insulting and inaccurate. To be thrown into stories about
"accounting scandals" damages our reputation and casts aspersions on our
employees.
As the Tyco Defendants either knew, or were reckless in not knowing, those statements when
made were materially false and misleading and omitted material information.
161. Indeed, inany of the reassurances were eventually revealed as false by't'yco itself
in the December Report, which further disclosed that during the SbC's iir^t investigation of
accounting wrongdoing in 1999-2000, the Tyco Defendants withheld responsive documents.
When the SEC rc-opened its investigation in 2002-2003, Tyco produced those missing
documents. Ultimately, as explained above, the SEC's second investigation sound a numbei of
accounting improprieties and some of Tyco's financial data, consequently needed to be restated.
S5U
a
0 0I
H.6•
ENDANTS' WRONG-DOING:MATERIAL OMITTED INFORMATION CONCERNING LOWING
OF THE COMPANY BY ITS SENIOR EXECUTIVES
162. From at least 1997 through June 2002, Tyco's top three corporate officers,
Kozlowski (CEO), Swartz (CFO) and Bclnick (Chief Corporate Counsel) received hundreds of
millions of dollars in compensation and henefiled from a number of other related party
transactions - all of which the Tyco Defendants wrongfully failed to report iii i yco's SEC'
filings. The failure to disclose these payments was a gross violation of GAAP and caused
Tyco's financial statements to be materially misleading to investors.
A. Undisclosed Executive Compensation
163. As Tyco admitted in its September and December Repot Is, the C'ompawwy paid its.
OxeCL1tiVe officers millions ofdollai's in compensation that was never disclosed in I1 e Conipany'ti
publicly filed financial statements.
1. Abuse of Tyco' s Interest-Free Relocation Loan Program
164. Tyco offered certain employees a Relocation Loan Program designed to
compensate Tyco employees required to relocate when Tyco moved its corporate offices from
New lIampshire to New York City. The program also provided henetits to employees require([
to relocate to Baca Raton, Florida when Tyco moved some of its staff there. The RLP did not
provide for relocation loans for moves to any other location or for loaius RUr any other purpose.
165. As Tyco admitted in its September Report, the Individual lletindants used the
R I .lP to grant themselves millions of dollars in loans and benefits. For exanmple, Kozlowski
received more than $61 rhillion in unqualified RLP loans. of which approxiriiately ¶ 9 million
{ 51
0rIL
was improperly forgiven, $21 million was repaid without interest, and $20 million was
reclassified in violation of the RLP. Swartz similarly received over $33 million in RLP loans for
unqualified relocations, of which approximately $10 million was repaid without interest, $10
million was improperly forgiven and $12 million was reclassified in violation oFthe RLt'
Similarly, Belnick improperly used more than $14 million in RLP [finds fora renovation of his
New York apartment and to build a home in Utah . As set forth in Part B below, the Tyco
Defendants failed to disclose these RLP loans in Tyco's SEC filings
2. The "TyCom Bonus " Misappropriation
166. In September 2000, Tyco paid a special "bonus" purportedly related to the
successful TyCom initial public offering. Fifty-one employees received a holm , at a total cost
to Tyco of more than $96 million, of which Kozlowski received nearly $33 million and Swartz
received more than $16 million . The Tyco Defendants failed to separately a:- d clearly report this
compensation in Tyco' s public filings as required by GAAP.
3. The "ADT Automotive Bonus" Misappropriations
167. Tyco issued a second special bonus paying nearly $36 million to 16 of idle
Company's executive officers and key managers, purportedly for their contribution toward the
divestiture of Tyco's ADT business. None of those bonus amounts were disclosed to investors in
Tyco's SEC filings.
4. Key Employee Loan Program
168. Tyco's Key Employee Loan Program (KEL) was intended to l,rovidc low interest
leans to enable Tyco executives and employees to pay taxes due as a result of the vesting of
ownership of shares granted under Tyco's restricted share ownership plan. Elnwover, as '1'ycu
52
S.
admitted in itsSeptembe- Report, the Individual Defendants received KEL Wilds for improper
purposes which were not disclosed in Tyco' s financial statements.
169. For example, according to the September Report:
As of August 1998, Mr. Kozlowski's total KF?f., account balance was$132,310. By August 1999, Mr. Kozlowski's outstanding balance hadincreased to over 555.9 million. By the end of 2001, Mr. Kozlowski hadtaken over 200 KEL loans - some for millions of dollars, and sonic as.small as $100, Mr. Kozlowski used these loans to purchase, develop andspeculate in real estate; to hind investments in vitrious business venturesand partnerships (including private ventures in which both he and Mr.Swartz used Tyco KEL loans to invest); and for miscellaneous personaluses having nothing to do with any taxes due on the vesting of his sharesof Tyco stuck.
Mr. Swartz, like Mr. Kozlowski, borrowed millions in non-program loans.
Like Mr. Kozlowski, Mr. Swartz used those unauthorised lnans to
purchase, develop and speculate in real estate; to fund investments in
various business ventures and partnerships (including private venno es ill
which both he and Mr. Kozlowski used Tyco KEL loans to invest); and for
miscellaneous personal uses having nothing to do with the ownership of
Tyco stock-
Mr. Swartz also generally abandoned his investment in the C ompauy byselling substantially all of his restricted shares when they vested or shortlythereafter - thus violating both the spirit and the letter of the K1--'LProgram.
170. The Tyco Defendants misled investors by hailing to repo rt in the Company's 'S PC
filings, the full amount of KEL loans granted to Kozlowski and Swartz, as set forth in more
detail below.
5. Belnick's Undisclosed Executive Compensation
171. In April 2000, the Tyco Defendants awarded 13clnick 100,000 restricted shares of
stock , with 50,000 shares vesting r,n September 30, 2000 and 50,000 shares vcsling oat
September 30, 2001. In July 2000, the Tyco Defendants awarded Beliiick an additional cash
53
E
bonus of$2 million, separate from and in addition to his agreed upon bonus; clung with an
additional grant of 200,000 shares olrestrieted stock - all vesting one year lutet.
172. Those bonuse s made Belnic k cne of Tyco's friar hit;hrst pi (l exeefrtive rrf?icers.
According to SEC Regulation S-K Item 402, the compensation id each of thesc iirur highest paid
cxeeutives must be disclosed in proxy statements. The C'yeo Defendants, however. caused $1
million ot'Belnick's bonus to be falsely characterize(] as a special TyC'onu borcu,. As a result,
Be] nick dropped out ofthe category ofTyco's four highest paid executives and tfhe 1'ycu
Defendants avoided disclosing Belniek's compensation altogether. As the' I'y'eu 0ci'endants
knew, or were reckless in not knowing, the failure to report Belniek's eon-Lpunsa[tion in Ty;;o's
public financial statements was a material Omission.
B. Self-Dealing Trans:netiomis tout Other MIsnises of C'nrporate l'rnyt
173. In addition to their failure to accurately disclose cxccutivc eunipensatio0, the
Tyeu De€endants also !ailed to disclose numerous other instances oisell-dealing and abuses of
corporate trust. These include, but are not limited to, the. following:
1. Kozlowski ' s Fraudulent New York Home Purchase
174. As'ryeo admitted in its September Report, a'1'yoo subsidiary purchased a.
uoopeiative apartment in New York City in November 1999 fur $51547,24 "upon Mr.
Kozlowski' s instructions," and made subsequent improvements to it. [ hi Sci,leiiiber Rep=ort
admitted that "Mr. Kozlowski purchased this property 1rorrr the Tyco suhsish Irv in May 2000 at
the depreciated book value of$7,011,669, rather tliaii its then current market vuiiie."
54
2. Concealed , Fraudulent Overpayment to Kozlowski for N I I Prnjperty
175. 0n July 6, 2000, a Tyco subsidiary purc liased property in Rye, New l- nipshirv.
inn i Kozlowski for approximately $4,500,000. Ailer an appraisal in March 002 valued the
property at $1,500,000, Tyco wrote down the value of the property cold charged the excess
payment to expense.
3. Kozlowski's Non-Legitimate Business Expenses
176. Kozlowski "used millions of'dollars uC Conipany fbricls to lay fhr his other
personal interests and activities ... including a $700,060 investment in the fides 'Endurance'; and
over $1 million in undocumented business expenses , including a privat e venture (West Indies
Mtanageirfent - 5134,1 13 ); jewelry ($72,042); clothing {$155,067); dowers [ i ^) b,` 43); club
niennhcrslup dues ($O0,427 ); wine ($52,334); and an undocumented $ 1 10,000 r.ltar'ge for the
1)U orted corporate use oIMr. Ko•lowski's personal yacht, 'End Cava u r. "'
177. In the course of the criminal trial against Kozlowski, ten:=secirlnrs intrnducecl
evidence of numerous other, egregious exarnplcs:
• Kozlowski harrowed short-teen loans front Tyco to purchase a $4.7 iiiilliet}painting by Renoir as well as other paintings. These funds were apparently drawnfrom an 1,DK account fermi which Kozlowski could burrow nioliey for a shortperiod without paying interest.
• Kozlowski used Tyco funds for a $2 millions, week-long him thtiay celebration 16rhis wife at the Italian Island of Sardinia. Iir'Tycn'a 2001 Annruial deport. the swimyear as the extravagant trip, Kozlowski told shareholders of athroughout the entire organization to reduce costs."
• A furmcr'1'yco marketin; ittanager , who had an inthuule meliutionship with .defendant Knilowski, lived res it-freq. iii several Tyco aparitnejiis and received a
loan program credit in excess of $450,000
n In 2061, Kozlowski purchased a S5-3 ti million ring for his wifi: Lim q,, Ty1:n tt ids.
55
0 A
4. Kozlowski's Charitable Contributions For Personal Benefit
178. Tyco made at least $43 million in donations, which were represented in the
trtaiismittal letters as Kozlowski's personal contributions car were othcrv ise to Kozlowski's
benetit. For example, as Tyco admitted in its September Report-
[A 1 1997 pledge to Seton Ifall University that enclosed a $1 ]nilflon fycocheck with a letter signed by Mr. KOLluwski that ieIerrcd to `7ny pledge iu
Seton Hall University-" Mr. Kozlowski made two other itiillion-dollar
pledges to schools under his own name but using Tyco funds, and anode
several other pledges that were puhliefy ari:znunced as being fi'onn Mr.
Kozlowski, or in which a facility was named after him of his family, even
though he had used Tyco's money to make the pledge.
179. In addition , Kozlowski donated $4 mil Ilon to Canihridgo t trriv^r-sity to study
cot,porate governance, falsely claiming that half of the contribution was heitn' made from his
persona! funds, whereas in fact all the money had hcca appropriated trout Tyco-
180. According to the September Report:
[ro]ost egregiously, in 2001 Mi. Kozlowski donated to the Naninel;utConservation Foundation a total of $1,300,000 iii Company inoney . The
donation was used partially to purchase 60 acres of pioperiy called"Squam Swainp" adjacent to Mr. Kozlowsk i's own Nantucket estate onSquam Road. The effect of this gift was to preclude future developineiitof the land and thereby increase the value of Mr. Koztowski's hom4,
5. Walsh Payment
181. In early 2001, Walsh, Tyco's f.winer Cfiair3n<<n of its Compuns utIn'n Comm111 ittee,
recuinniended to. the Board that Tyco acquire a financial services company, a iid [a ter proposed
that he inntiuduce Kozlowski to the Chaimiun acrd CEO oi'the C'1'1 (iroup, a large financial
Services company. After consummation of the CI'l:+'•I'yco merger, Tyco paid Wakh a $20 million
'- inder's fee " for his role in the transaction . The payment to Walsh was first in Tyco's
5 t,
0 A
January 28, 2002 amiual proxy statement; that same day, the price rrfTyrcn', stock tell firont $42
per share to $33.65 per share.
C. Material Misstatements anti O missions in Tyco's SEC Filings
182. The Tyco Defendants were obligated to disclose accurate infhmiation concerning
executive compensation acid related party transactions . For exarnplu , S1•'AS No. 57 of [aSAP
iMI uirCS that financial statements idejntify material related party transaactions =and disclrose: (a) the
nature of the relationships); (b) a description of the transaction; (c) the dollar amount of
transactions for each period for which an income statement is presented; and (d) the annoutats clue
from or to the related parties as of the date of each balance sheet. Related parry transactions
include transactions between an enterprise and its Directors of the Hoard, f'hicf Fxecutive
Officer , Chief Operations Officer, Vice Presidents in cllaige of pinleipal ljusliie ;s luuetiuims , and
other persons who perlbrm similar policy-snaking fwictitit ) s. gFAS No. 57 alstr requires
disclosure of compensation arrangements that are not in the ordinary course.
183.. GAAP further provides " that amonri ts due to and loin 0tlicucra amt directors,
because of their special nature and origin, ought generally to be set forth separately in firnaneiul
state3nents] even though the dollar amounts irnvolved are relalively stinill."
184. Further, Item 402 of Regulation S-K provides:
(2) All compensation coveredl. This item requires clear, ckmcise and
understandable disclosure of all plan and non-plate compensation awartlud
to, earned by, or paid to the named executive officers designated unii,cr
paragraph (a)(3) ofthis item, and directors covered by paragraph (g) of'tliis
item by any person for all services rendered in all papacities to the
registrant and its subsidiaries, unless ntherwiscc specified in this item n
(3) Persons covered. Disclosure shall be piovided pursuant to flier: item
for each of the following (the "tamed executive offs ers"):
57
0 0
(I) All individuals serving as the rerp strant's dhirf executive
officer or acting in a similar capacity during the last completed
fiscal year ("CEO"), regardless of compensation level;
(ii) The registrant's tour most highly coiupeusated executive
officers o ther than the C EO who were serving as CXCCLQiVC others
at the end o1 the last completed fiscal year:
(iii) lip to two additional individuals ibr whom disclosure would
have been provided pursuant to paragraph ( a)(3){ii} of this ii em but
for the fact that the individual was not Serving as an executive
officer of the registrant at the end of the last completed lisc-oI year.
Itrstr-uctions to Item 402(q) (?). 1. Determination ref' Most lligllltd
G)mien.rcrted Exc c'irtivi' (J/f cc rs. '[ he determinatir,ii as to whir:lh r•.xeei.ttiv'e
officers are inust highly eurlrpertsated shall be made by re!` rencc to total
annual salary and bonus for the last completed fiscal year....
185. Similarly, Item 404 requires disclosure of " Certain Rela it ionzships and Related
Tru i savt ioii s":
(a) Transactions With Alimagement inn! tltiicr.' Describe hrielly aaijv
transaction, or series of similar transactions, since the hegiiiilim-t al' the
registrant's last tiacaI year, or any currently 1) rnposoti transrietinii, ur eriL:w
of similar transactions, to which, the registrant or any of its suhsidi;r1ic1.
was or is to be a party, in which the amount involved exceeds ,oil.[}tftt,
and in which any of the following persons had, or will have, a direct or
indirect material interest, naming such pcrton and indicating the person's
relationship to the registrant, the nature of such person's interest in the
transaction(s), the amount of such transaction(s) and. whr-re practiL:,Ihlc,
the amount of such person's interest in the transact inn(S L
(1) Any director or executive officer of the remsir alit(2) Any nominee for election as a director;
(3) Any security holder who is known to tlic registrant In own oI-
record or beneficially more than five percent of any clay; ; of I I;r-
registrant"s voting securitics; and
(4) Any member of the immediate family i f"army ol'the f6rcguing
persons. Instructions to Prrrrrgraph {a) cf 1cm /0-f,
1. The materiality of any interest is to he determined on the lrisis
of the significance of' the information to Investors in light of all the
circumstances of the particular case. The iniportanec of' the interest to the
person having the interest, the relationship of the Parties to the transactiinu
with each other and the amount involved in the transactions ai c among the
factors to he considered in determining the significance ot'the infhrin:itirin
to investors. .
7x
0 0
(c) Indeb(edlness of'Managmeru if' any of the Following persons has
hcen indebted to the registrant or its sulisidiaru-s any time siiice the
beginning of the registrant's last fiscal year in an amount in excess of
$00 , 000, indicate the name of such person, the nature of the pel tinll's
relationship by reason of which such person's indebtedness is requited In
be described, the largest aggregate am aunt of indebtedness oUtstamling at
any time during such period, the nature of the indebtedness and of the
transaction in which it was incurred, the amount thereof outstanding a cif
the latest practicable date and the rate ofinterest paid or charged thereon:
(1) Any director or executive officer of the registrant;
(2) Any nominee for election as a director;
(3) Any member of the iuiiiiediate Iamily of the persons
specified in paragraph (c)(1) or (2);(4) Any corporation or organization (other than the registrant car at
imisjority-awned subsidiary of the registrant) of which any of the pej sons
specified in paragraph (c)(1) or (2) is'an executive officer or partner or is,
directly or indirectly, the beneficial owner of ten percent or fore of, ally
class of equity securities; and
(5) Any trust or other estate. in which -.in y ol'tlie persons spec itied
in paragraphs (c)(1) or (2) has 3 tiubstarit al hlenelicial interest or as h)
which such person serves as a trustee or in a similar capacity.
186. In contravention of these clear standards, theTyco Defendant;; routinely provided
liilse and misleading intormution, and oth or inlomiation, concc1-11ing executive
coiTrpcrtsatinn. Indeed, from 199 through 2002, Tyco's annual proxy I6r the ce- electiolr o f the
hoard of di rectors (the "Annual Proxies") provided a statement o execriike r.oI7rpeiisatioil which
fililed to [idly disclose the compensation and large bonuses set fnrtlr above.
187. For example, the "Annual ProxIcs" contained a also description oI'd ic amounts
r wed under the KEL program:
n "At September 30, 1908, the amount of loans outstanding liiirler
the Loan Programs totaled $22,162,82'S of which $4 ,`x"21,'?1,021 was
loaned to Mr. Kozlowski ... and $2,75 0 ,001) to Mr. 4.arrtv.. ' I lie
largos amount of indebtedness since October 1, 190, Iio c°;ILh c31
these individuals is: Mr. Kozlowski . %'22,474,145 . . and Mh'.
Swartz. ." ( I1N' Proxy)
19
0 0
`At September 30, 1999, the amount of loads outstanding under
the loan program totaled $19,569,137, of which So was lnatied to
Mr. Kozlowski.., and $0 to Mr. Swaitz. The largest amount 4indebtedness since October 1, 1998 itu;unecl by each oftlic Named
Officers was: $52,688,249 for Mr. Kozlowski ....'• (Tyco's 10-
I /A for the fiscal year ended September 30, 1990 ({he -1/2S/00
i O-K/A"))
"At Septcniber 30, 2000, the amount of loans outstaiiding under
the [Key Employee Loan] program totaled $11,421,65-5, of which
nothing was outstanding for any of the Named Officers. The
largest amount of indebtedness since October 1, 1999 16r c:ich of
these individuals was $12,711,768 for Mr- Kozlowski, $304.36.3
for Mr, Garvey, and $1,000,000 for Mr. Swartz. Ncithei DE-
Gromer nor Mr. Media had loads under the program duri€rg fiscal
2000." (2001 Proxy).
"At September 30, 2001, the amount of loans ourstandim., under
the fKey Employee Loan] prograrn totaled $1 1,230,192, of which
S0 was nutslanding for Mn Kozlowski- S23 1171 8 was outstanding
for Mr. floggcss, $20,702 was outstanding for Mr. Meelia. uiirl So
was outstanding for tMr. Swartz. The largest ,slough of
indebtedness under the program during fiscal 2001 for each <'1- the
named officers was $23,009,7t)3 for Mr. Kozlowski, $O,^ttU,tx}it
for Mr. Swartz, $20,702 for Mr. Media and 5231,718 fio€ MnBoggess....
As the '1'yco Defendants knew, or were reckless in rot knowing, those stalcnrr°irts when made
were materially false and misle ading and omitted material intormation.
188. The Annual Proxies from INS through 2002 also cotllaiimed nitslr ailing
aRsuraiices concerning the integrity of the compensation process at Tyco, ilie I utiiri€
"The Compensation Committee @1 the Board of 1]irceto rs dpprcrvcs
alt of the policies under which compensati on is 1) aid or awarded to
the Cornpuny' s executive officers and key managers and oversees
[lie administration of executive compensation lrrogranls. HiCoittperrsatiors C oiiitnittrec. is composed solely of indepe ndent
directors , none of whom has any interloc k ing relatioiIs ltiI). willr the
Co urpaiiy that arc subject to diselusure under rules oI the SL(-
relatirrd to proxy state€€tents." ( l()')8 Proxy . A similar sLateine€€t
appears in each of the annual proxies tiom I trc?S through 9)112.)
60
0 10'
"Tyco's executive compensation program [offersi signi ficuntfinancial rewards when the Company and the individual achievesuperior results (as exemplified in the above chart), butsignificantly lower compensation is paid if performance goals arenot met. Specifically, ift.he compensation targets are not achieved,the Company's executives are ineligible for either cash h(nnuse. s orequity-based compensation. In order for Mr. Kozlowski arid Mr.Swartz to earn a cash bonus in fiscal 1999 , cash income andoperating cash flow growth of a minimum of 15% over fiscal 1008performance was ref}aired, and before they crude earn shares infiscal 1999, an increase in earnings per share of at least 17.5 ;%,,growth over fiscal 1998 was required...." (2000 Proxy. A similarstatement appears in each of the annual proxies from 1008 througfh2002)
.I'}ie Compensation Committee administers the loan program. 'I heCompensation Committee autlirrri,.es lo.riis, which may net exceedthe amount allowable under any regulation of the United StalesTreasury or other applicable statute or regulation. [.cans may herequired to be secured by Tyco common shares owned by theemployee or may be unsecured. Loans generally bear interest atTyco's incremental short-term horrowitig r.stt: l1}r I 09(} )Loans are generally repayable in ten years or when (lie participantreaches age 61], whichever occurs first, except that curlicE-payinunlti must be made in the event that the participants-employment with the Company or its subsidiaries terminates. 'I heparticipant is also required to make loan payments upon the sale crother disposition of Tyco common shares (other than gifts tocertain family members) with respect to which loans have beengrnzrtcd. (201)0 Proxy. A similar statement appears in each of theannual proxies from 1098 through 7007)_"
As the Tyco Deicndants knew , or were reckless in itot kiirrwirig, Ihose statenunts wheat made
were materially false and misleading and oinitted material II160nii , iti(rn.
il!_
ADDITIONAL ALLEC:A'f10NS RC'ARDING SCJENTER
181). F3etween August 1, 200 11 ,imiri January i(t, 2002, while Kox)owski serv al as a
director and Chicf Exec ul.ive Officer of ...yen, he bought anti sold a numh>„r cal I ycu equity
61
Ll C
securities within a six-month period in violation of 15 § 78p(b). fictweclt August 1, 2000
acid Apri126, 2002, while Swartz scrved as an executive vice president rint.I CI iic IFinancial
Officer of Tyco, he bought and sold a number of'['yco equity securities within a six-[Month
period in Violatinrt of ] 5 1 ].S.C. § 78p(b). Kozlowski and Swartz 's estimated profits torn these
short swing; trades exceed $ l0 million.
190. Moreover, while the Tyco Defendants were issuing materially tultie. favorable
statements about the Company's financial condition, and concealing negative information, tho
Individual Defendants, who were aware ofthe truth, were henelititig by selling large blocks of
the Company' s stock at artificially inflated prices. Such sales were unusual in their amount and
in their timing. Thy, numermis and lepcated insider sales of Tyco !ommii P i stock by the
Individual Defendants imposed upon them an additional duty of hill disclusutc of all otthc
material facts alleged in this Complaint.
191. According to a February 13, 2002 article in Ti [f'. NEW Y(Itk I IMF,4,'iltli0ug,li
Kcn'lowski and Swartz publicly stated that they rarely if ever sold their'I yt o s h:Eres, late in IiseaI
2001) and during fiscal 2001, and unknown to the investing public, Kozlowski and Swartz
secrctl} sold approximately $105 million of Tyco stock dire cagy to thL- COmis ny. i NOsL: sales
were not disclosed to investors until November 13, 2001 - thirteen months aiier the first of those
sales were made (the "Undisclosed Insider Sa) es"). The Undisclosed Insider Sal c,-, are especially
suspect beccause, by snaking them diieuLly to the C'ompauiy, Kozltuws:i and Swilrtl. did not Imav,!
to disclose them in SEC' Form 4 withinn 10 days atlcr the month of the sales, i s nuId be reyuircd
with open-market sales. By selling their sha,es back to the C'uumpaiiy, Kuzlotiw-,Iti and S s••arll.
were able to hide such sales from investors ter thirteen riiouiths.
62
Cr'1L -A
192. A February 11, 2003 article in T1 IL. NEW YORK TIMES discussed the L !ndiseiosecl
Insider Sales:
Two top executives at Tyco lnternation aI sold more,, than 41100 tirillitirt ill
Tyco shares in late 2000 and 2001, but the sales did not become public ti)r
as ]onl; as a year. Today, Tyco shares arc worth. about hall what they were
at the time of the trail sactinns .... [T]Iiese sellers ... have taken advanta+s e
of an 11-year old loophole in federal securities laws Ihat allows e' eeutives
to wait aas long as 13 months to disclose their sales when the buyer c^( the
their shares is the company itseill The loophole is the samc one that
enabled Kenneth L. Lay, the Hornier chief executive of Enron, to sell
millions of dollars of Enron shares in the months that the stock- was
plummeting , without filing the usual federal disclosure fin-ms for insider-
sales . In the wake of Enron's collapse and new questions about Tywo's
accounting methods , corporate governance experts say the rule shnrild be
changed so that investors can have a clear, prompt picture of executive
stock sales.
193. Furthermore, the Company' s Incentive plats or additional paym ents to
Kozlowski and Swar-rz were directly tied to the Cumpaury's repotted eaniitigs growtfr and free
cash t1nw. For example, according to the Cornpa1iy's St ht-dule 14A, tiled ooii January 217, 200
(the '20()1 Proxy'), the incentive eonipeiisatiun to KurfnwVski and S1Nallr wit:; based ul)t)li, irit'er
c71ro, (i) an increase in earnings for the Company, and (ii) an inlproveinent in opciatiLig cash flow
for hire Company. Tyco's 2001 Proxy also explicitly adniittcd that Koslu wsl; is =rid Swart-'s
incentive compensation "is in direct correlation to Tyco's performance and .., ulfintately
determined by the. Future performance of Tyco as reflected by its share Price.". These criteria
applied in each cif the years .1098 through 2002 and created a strong nio[iye h r rliw Tyco
DctInLiants' wrongdoing
63
r 1LJ
IV.
0
PWC"S PARTICIPATION IN `flit? FRAUD
1()4. Tyco is a long-standing major client of 1'wC and a signitic:ant sou tec OF itu,onnc
iur PwC's Boston office, 1Juririg liscal 200 1 alone, 1-1 wC received more than S5 I iniliio n in fees
lioin l yco; 75% of which were non-audit fees, such as fees for consulting inrl other services
rendered to Tyco by PwC. PwC 's personnel were regularly present at Tyco's corporate
headquarters and had access to and knowledge of. Tyco 's internal acenuntiw, rectortls and
confidential corporate financial and business infhnnatirttn.
195. PwC had intimate knowledge ofTyco s financial reporting practices based on its
access to internal accounting records and 'l'yco employees; as a result, PwC knew o1 OF
recklessly disregarded , Tyco's improper financial reporting (detailed at lcmigih rilx,Ve). Pw' .
nonethutess issued unqualified audit opinions from 1t)9S through 2lltl2',
196 For exarlrple., on May 29, 1999, PwC' issued its audit opinion <<utceniillgTYCO'S
19 PS year-end financial statements , falsely representing that the slatemcirIs were. in cttintirrnii ty
with GAAP and that . PwC's Audit was conducted in coatorrnity with (iA.AS:
to our opinion, based upon our audits and the reports of other auditors. llie
accompanying consolidated balance sheets and the related consoli.cialed
statements nf- operations, shareholders' equity and cash it Iws pru'sk'tlt
fairly, in all material respects, the financial position of Tyco tritcrnattonLal
Ltd. and its subsidiaries at September 30, 1998 amid P-31t7, and the results
of their operations and their- cash flows for the years ended Sr:lptenihci 30,
J OK, the nine months ended September 30. 19M7 and the veai cnuicd
Decciiiber 31, 19)6, in coal' unity iailli generally accepted accotuftimie>
l-)Iineipleti iu the United States. In addition. in our opinion. [lie
accompanying financial statement schedule pre.semlts ia{t'ly, in all inalcrinl
respects, the information set thrth therein when react in conjunction with
the related consolidated financial statenicnts.... We conducted our JLlrllls
of these statements in aecurdance with generally accepted auditih g
stanLlards in the United States, which rtcluire that we P1 Lill and Iierrur II i the
64
0 0
audit to obtain reasonable assurance about whether lie lirnru€cial
slit tements are free of material mnisstatenlent. An audit includes Cs am€IIi€€o,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estiniates made. by management, and evaluating the overall
financial statement presentation. We believe that our audits and 1hr: reports
of oilier auditors provide a reasonable basis for the upinaur expressed
above.
I97. 'I'll e AMPI'1'ycn Proxy incorporated by refi'rcrlce Tyco 1s consolidated financial
statements for the year ended September 30, 1998, the nine months ended September 30, 1997
and the year ended Dece.Inber 31, 1996, as audited by PwC.
198. On October 21, 1999, PwC issued i ts audit opinion on "1'veu' S 1090 year end
financial statements. PwC's opinion falsely stated that the statements were presented in
c.rmrllbrnlity with (IAAP and that PwC''s audit was pertoruled ill aecojdaiwv with [.;AAS:
In our opinion, based upon our audits and the reports Of other auditors, the
accompanying consolidated balance sheets and the related consolidated
statements of operations , shaleholders' equity a nd cash 11()wY s pte.5elrtfairly, in all material respects, the financial position ot'1'yco I nlernatinnalftd. and its subsidiaries at Septeniber 30 , 1i)019 turd 190,8. arid the resultsof their operations a nd their cash flows for the years ended September 30.
1999 and 1998, and the nine months ended September 3(t. 1907, illeonfnrll]ily with rirXountii € g [principles generally accepted in tine I lustedStates . to addition, in our opinionn , the accompanying financial stalemcnt
schedule presents fairly, in all material respects , the information set IIirrththerein when read in conjunction with the related consolidated financialstatements .... We conducted our audits of'these s tatements in accordancewith auditing; . standards generally accepted in the United Stales, whichrequire that we plan and perkurm the audit to obtain reasonable rrtisurrltweabout whether the financial statements are tree of material mis s tatement.An audit includes examining, on a test basis, evidence sul^l>crrt€n theamounts and disclosures ill the financial statenments, zi sessilnr^ theaccounting principles used and siyliifieuinl etam rlos €n.irlt Iz^manlagenment, and evaluatinsg the ciVL-Uall fin€€ncial statement 1^I'cti^r7i,€tI l^.
We believe that our audits and the reports (it other auditors prov ide tlreasonable basis for the opinion crpresscr1 above.
I 9r)PwC issued nearly identical opininiis in ?ON ) it lILI 2U0ll .
65
E
200. PwC;purposely ignored Tyco's improper accounting practices 411L! issued
unqualified audit opinions on Tyco's financial staatcmctics, even though f'wC taicw or i klessly
disregarded that: (a) the financial statements had rn0t been prepared in conldmiity with tlAAI' in
ntnEZerous respects and slid not present fairly, iii all ntateriaf respects, the liriatic] ,il position ill
Tyco; and (b] PwC had not audited these financial statements in ae cu nIaiice with GRAS.
201. The vloIations of (iAA P i ncludc(t among other things:
the improper accounting for acquisitions; F
• the manipulation of accounting reserves fot the purpose of theCompany' s results;
• the failure to timely recognize expenses, including imli,iiwient5 in the value ci#'the:Compuny's assets;
n the 1aiIur0 to disclose material related l rty trall sactiiin ,:.uid
n inflating the Company's reporter] results.
202. PwC's audits were not in compliance with GAAS in at least the tvllowing
rctipeels:
• PyC` violated (;AAS Standard o f Reporting; No. I that requires the aut- it report to
state whether the financial staternerits are presented is accord, irnc:c with CJAAP.
PtivC'S opinion falsely represented that Tyco's 2001, 2000, 191M ;ind 19981
financial statements were presented in conformity with GAA 1' when they were
not, for the reasons herein alleged.
• PNv violated GAAS Standard el'Reporting No. 4 that tugt lies Thai, when all.
opinion on the financial statements as a Whole cannot be e.spresscd, the reasons
thercft re must be stated. 11wC should have stated that no opinion could he issued
by it can Tyc'o's 7001, 2000, 1909 or I L?48 financial st<<1en ienis oI issued a I I
adverse epinioii stating that lhes riIli neiuml Statc]llenlls wCrr, not 1i1irly prc-, ciutec1,
• PwC violated GAAS General Slanciaid No.2 that requires that an independence iiimental attitude is to he maintained by the auditor in all fizatter,, reined to theassignment.
66
0 0
PwC violated SAS No. 82 in that it tailed to adequately consider the risk that the
audit financial statements ul"Fyco contaiiied materiel ansstaterrieuts, whether
caused by errors or fraud. PwC knew or recklessly ignored numerous events and
conditions that occurred or existed during the relevant period. which events and
conditions are specifically identified in SAS No. 82 as being "risk factors relating
to misstatements arising from ti-audulent financial reporting." These risk f actors
include, but are not limited to: (a) an excessive interest by rnaiw o)e.nt in
maintaining or increasing the entity's stock price or earnings trend through the use
of unusually aggressive accounting practices; {b) a failure by irrar:agenient tO
display and communicate an appropriate attitude regarding m1crtnii control and
the financial reporting process; (c) management displaying; a significant disregard
for regulatory authorities; (d) rnanage:r ic.iit continuing to employ ,ut ineffective
accounting, information technology, or internal auditing staff; (c) significant
related-party transactions not iir the ordinaay course olbrusiuess nr with related
entities not audited or audited by another tint; (1) significant hank accounts or
subsidiary or branch operations in tax-haven jurisdictions iirr which there appears
to he no clear business justification.
PwC violated SAS No. 54 in that PwC, with knowledge or reckless disregard ofpossible wrongdoing by Tyco, hailed to perlOrm the audit proi:cdures required inresponse to such acts.
PwC knowingly of I ocklessly violated GRAS and the s1au:dards :,et Ibnllr in SAS
No. I and SAS No. 53 by, among other things, titiling to adequately Plan its auditand properly supervise the w irk. of assistants and to establish duel carry outprocedures reasonably designed to search fir and detect tic cxisauncc of errorsand irregularities that would have rr niaterial cfti.ut upon the financial slalenients.
PwC violated GAAS General Standard No. 3 that requires that dtue
care must he exercised by the siiiditur in the per l'ormance u i tl:c audit grid the
preparation of the report,
2(13. In addition, PwC violated the r'cquiremcnts of Section 1 i)A nfthe Sec uritius
L.xehangc Act, which requires auditors at' public companies to desig n prtti:eeifurc i; to pin tide
rea'a nahle assurance of detecting illegal ;.acts and to identify mater ial related party transac tions.
SeL'iion 1[lA nt'the Securities Exchange Act requires -,ern auditor to notify the Sl:C il'he or she
hecnines aware ot'intbrmation indicting that an illegal act has, or may lr,:ve occurred, ii
I,tunlagoiiicnt ter the Boas dj of the company tai Is to lak e apprcrl)ri.ite remedial notions With respect
to the illegal acts. PivC knew or recklessly ignored that it violated Section I [1A at the Serurtties
0 L J
v
Exchange Act in the perfonnance its "audits " of Tyeo's -'00 ] , 200U 1990 and f Q98 year-cu d
financial statements,
204. The SIC has concluded that 1'wC violated GAAS and SEC guidelines in
conducting its audits . Specil-ically , on August t 2, 2003, the SEC imposed suiucLimlis on Richard
P. Scalzo, the PwC partner in charge of Tyco audits for 1997 through ?0111. The SEC concluded
that Scalzo did not perform the audits in accordance with Generally Accepted Audit Standards
and that, it'he had , he would have discovered and disclosed much of the fraud at Tyco. The
administrative order barred Scalzo from practicing bet-ore the SEC.
INAPPLICABILITY OF STATUTORY SAFE IIAR60R
205. The Slat utory safe harbor provided for lbrwurd-looking, skit ciiicid.h Linder certai11
eircun1stances does not apply I0 any of the-, allegedly fake statements pleaded iii this Complaint.
I,he statements complained of concerned Tyco's financial Statements anc{ ]ti,tiuiical ,and/ar
current conditions affecting the Company. Many of the statements pleaded hero ii were not
specifically identified as "forward-looking siateineutts" when rnurlc - To the exteutl of any
tin ward-looking state it tents, there. were nit) nteaninztuI cauutionirry Slat c•incnts identifying tic
important then-prescat tau .tors that could and did cause actual results to (lifer it,;1tcrially froitu
those in the purportedly forward-looking statements. Altcrnativcly, to the extent that the
statutory safe harbor does apply to any forward-looking statements pleaded itcrein, clckuulaitts
ire liable hi those False tkOrwnd - looking statettieuifs because ,it the tulle; each of Iliusc staLe i i hits
t' as iuade, the particular speak er knew i recklessly disregga ided tliat the :; Ial cuient was false ur
niiSICiltling, knew of nr recklessly disregarded and laded to disclose adveuse iIIt'MI 1ntiof i relat II1g,
to the statement, and!oi the. statcmeiit was authurifed and./or approved l}y , i n executive olliccr of
68
E LJ
1'yco who knew recklessly disregarded that the state inent was material ] v f,ilse and misleading
when made.
06. Any warnings contained in the press releases and the financial statements quoted
herein were generic statements of the kind of risks that attcct any company and misleadingly
contained no specific factual disclosure of any of Tyco' s accounting irregularities.
LOSS CAUSAT ION
207. Plaintiffs were damaged as a result of defendants' fraudulent conduct set forth
herein . The (split-adjusted ) price of Tyco's coIluuun stock was at $35.94 on the day Tyco's
merger with AMP closed (April 4 , 1999). Thercaft.er, while Tyco Defendants repeatedly tailed
to disclose material information , price steadily rose and stayed in the $5(}i -- reaching a high
of $59.70 on December 5, 2001. On January 29, 2002, the day alter the Walsh lruynient was
(Iisulrrted ui IlIC Company's ?0U`? Proxy Si aIrill ent, ,rycu's shares fill from .9$-12 ter $ i s. h5,
reducing the company's market capitalization - according to Tyco - by alino t $17 billion in one
day. Subsequently, as the Tyco Defendants fought off attacks on the credibility of the
Company's financial statements and the integrity of it, m^rnagenlent , the prier a€'Tyco ctmmll-ion n
stock- slid down to S2 0 per share . Subseq uently, on June 3. 002 Tyco shares E l l S00l to close
at $16.05 on news that Kozlowski (i) was the target of a criminal investigation king undertaken
by the New York District Attorney into possible violations of'state sales tax laws, and (it) Watt
resigning as ilie CEO of Tyco. Finally, nn June 7, 200?. Tyco stock tdI to a r,i' - ycear I ow , dodown
$4.50 tc $10.10 per shire, on news that: (1) the Manhattan L)A's office and the bruadciicd
their investigations beyond Kozlowski to determine ill yea c' eeutives used tire c•omnparny's cash
to buy :11141 art and homes; (2) S&P and Moody's reduced Tyco s debt to it #cst itivvcstrncirt-gradc
69
r1
rating just above junk bond status), forcing Tyco to repay at Ieast $53t} million in debt; (3) the
sale ref CIT was delayed by the SF C while its used investigation continues; and (4 ) Tyco
corlllt7ned that it was launching its own "coinpreliensive internal Invest igatirnz" into Kozl(Pwsl:i's
and ether exectitives' use of company funds.
COUNT I
VIOJ A'TJON OF SECTION 1 0 (b) OF TILE 1914 ACT kND RULE 101)-5
PROMULGATED THEREUNDER BY ALI. OFTHE DEFENDA NTS
208. Plaintiffs repeat and reallege each and every allegation above ,is it sei 1u» (h in Bill
herein.
209 This Count is brought by plaintiffs for violations of Section I [](h ) of the 1934 Act
and Rule I Ob-7 promulgated thereunder.
211). From at least 1998 through June 2002, defendants earned rout a scIinie, 1)larr and
course of conduct that was intended to and slid: (i) deceive the investing public. including
1'laintills; (it) artificially ini]ate and mainrain the market price ofTyco securities; and (iii) uriuse
Plaintiffs to purchase or otherwise acquire Tyco} securities at inflated I^z ir:r s. Iri iin-theraincc: r,l
this tunlriwfiil scheme., plan, and course of conduct, delcnchints luck the ztetiullks SL't Ibi th hcrejtl.
211. Defendants : (, r) employed devices, schemes, and artifice., for dctiauei; (b) mrrade
Li iitrtr(: statem ents of nnaterial fact and' r nrrritted to ;tale ntiaterial acts necessary to make (lie
statements made not misleading; and/or (e) engaged in acts , [)Iactiees, and ,l Crrui:tie 0fbtlsinvtia
that operated as a fraud and deceit upon the purchasers and/or acquirers nl the ['uruparly's stock
in an efTorl to maintain artificially high market prices liar Tyco securltIL S in \']L)latIoII oofyectiurn
10(h] tai the 1934 Act. 15 L1.S.C'. 78j (b), and Rule I Oh. - 5 pn mulgate cl tiicrei.iitder, 17 ('RR
70
iF- -1l-j
240.10h-}. q efendetnts are sued either as primary participants in the wrong ful and illegal
conduct charged herein or as controlling pe rsons as alleged belnw.
212, In addition to the duties of full disclosure: imposed•on Ocienr.iimts as a result of
their making affirmative statements and reports, or participation in tIme iruakitrg ol'ef'tirniinive
statements and reports to the investing public, they had a duly to proirlptly disseuiinale truIll. ul
information that would be material to investors. in compliance with OAAP acid the integrated
disclosure provisions of the SEC as embodied in SEC Regulations S-X (17 § 210,01 et
seq.) and S-K (17 C.F.R . § 229.10 et seq.) and other SEC regulations , including truthful,
complete and accurate information with respect to the Company's operations and pertnrninnice so
that the market pric es ofthe Company's publicly traded securitie s would tic based on truthful,
complete and accurate information.
213. Defendants , individually and in concert, directly and inriimectlyr . I-py the Use oof
mc.rns and instrumentalities of interstate conlmerce and/or the mails, engaged and participated iii
a crrntinuorrs course of'conduct to conceal adverse material iittornlatirnt about the Cwnpany's
lin^,.nciAll results, businesse s, operations , and prospects as specified hereiiI . 1 )1,1i: I rlaIits enlpIoy'eci
devvices, schemes, and artifices to defraud, while in possession of material, adverse, murn- public
infirrmation , and engaged in acts, practices , and a course cif conduct as a!Ieged lei-ein, in ,in
effort to Lissome investors ut'Tyco ' s earnings , assets, re.cnues expenses W tcl the acccurac y of the
(niipany's financial reporting of pertilFill a rice , which i11CIII ied lilt niL + lkiI1 .11. 1 11- 1110
participation in the making of, untrue staicrnents of n:treriai tarts !Ind 4Mllissi en'; to state tare
material facts necessary in order to make the s taternent5 mane ahnut the ( '0 1 111)' HIy's financial and
71
9 0 .1
business operations in the light of the c:ircunlstances under which they were made, not
misleading, as set forth more part icularly herein.
214. The Individual Defendants' primary liability arises 1roln the thilowing facts. (i)
they were high - level executives and directors of the Company during the relevan t period raid
were ntetnhers of the Company's manageiuent tealn; (ii) by virtue of their resporis ihi lities and
activities as senior officers of the Company, they were privy to and particilp,itc d iii the driltuing,
reviewing, and/or approving the misleading statcrrtcttts, iuriussiorls, relt-ase.srepo rrs, and other
puhlic representations about Tyco, and/or signed the Company's public: filings with the
SEC, which public filings contained the allegedly materially misleading sIMerneiiIs and
omissions; (iii) they knew or had access to the mma ted,rl adverse non-public: iiiliin nat ion -,about the
financial results oiTyco which were Oct disClosed; and (iv) they were await- ci the C'nntl,aun_y's
dissemin a tion of information to the 111vcsting public whic h they know or ] l [_klessly disre gaar[leil
was materially false and mitiicrldiiig.
21-S. Each of the defendants had actual knowledge tit the n}151r'pres^iliuuiMIS aril
[uniss1ons ofinaternrl facts set forth herein, or acted with reckless disregaard tier the truth in th:i1
They litilcd to ascertain and to disclose such tact,s, even] thouk;1h such facts were available to thciil.
Defendants' material misrepresentations grid/or emissions were done knowingly or recklessly
and fur the purpose find etl-ed aIcnncrtling Tyco's accartnIIii g irreguliuritit^s Wahl the undrsckusetI
acquisitions from the investing 1)ubli[; and supporting rho: ariificirelly itlflatL•rl p1 cc [n[it,
ecurities. If the defendants did not have fetal! knowledge s)f the rnisrelprescntations and
omissions alleged, they were reckless in failing to obtain such knowledge by dciibL:ralel}
72
0
refraining from taking those steps necessary to discover whether those staIemlefts were I:aIsce or
mtilisftadiiig.
216. As a direct and proximate result of the disseniinatiou of Ihi innterially titise and
misleading infoiniatiou and/or defendants' Iailure Ea di.scluse material facts, as set fri Ili herein,
the rnurket price of Tyco securities was artificially inflated at the time of the ktert er. In
ignorance of the fact that the market price OfTYCO'S publicly-traded securities was artificially
inflated, and reasonably relying directly or indirectly on the materially false ; nd misleadinv
statefnents made by deferidarits, or upon the integrity nithe market in which thee securities tradfe,
and the truth of any representations made to appropriate. agencies as to the investing public, at
the times at which any statements were made, and./in on the absence ufiii ateriaI adverse
information that was known to or recklessly disregarded by defendants but not disc1u cd ill
public stateniienls by such ricteadants, Plaintiffs put chased or otherwise acquired ihir value Tyco
securities at ar-tificially h igh prices and were deinaged tiicrehy.
217. At the time of'such misstatements and urnissioiis, Plairntiih. believed them to he
true and reasonably relied upon these statement and omissions in porch i sin therwis
acquiring l'ycn stuck, Had Plitintifis known of the Coniparzy's true iinauiciaf cot dition, they
would not have acquired Tyco securities. Alternatively, if'they had acquired such securitica,
they «•ould not have done sn at artificially inflated prices.
218. By virtue of the foregoing. defendants have violated Section 1 Eljii l of the 10.34
AL:1 1 and Rule 10b-5 promulgated thereunder-
21 Q. As a direct and jmroximatc re:.ult of ddetcikdazil .5' unlawful COUYSC imCCU] lduct in
violation of Section i 0(h) of the 34 Act acid Rule 10b-5 , Plaintiffs have been Lirunagcd and
73
J
Conlinue to be damaged in :lrm amount not yet fully determinable , but at least ui the amount of the
diminution in value of their shares n!Tyco and/or the diffe rence between the arlilicialIy inIIattd
price at which they acquired Tyco stock, and the true value of such share. aIStient Acicnnulailts
uiilawtill Course of conduct.
220. Less than two years elapsed from the time that PI aintitls discovered or reasonably
could leave discovered the facts upon which this Complaint is basal to the Iin le dint Plaintit'is
tiled their Complaint. less than five years elapsed [rol]l the time that the securities upon which.
this Count is brought were bane tide utTered to the time Plaintiffs filed ilicir complaint.
COUNT Ti
VIOLATIONS OF SEC;TEON 14(a) Of THF. 1934 .A ["1' AN II
RULE 14a-9 PROM LFJ ,GATEI]'FHEREINlWRR BV TlEE:
TYCO DEFUND AN'IS
`121. l'l;mintjfI rcl}cat and rea1Ieg.0 each and every al iccatisln al ) o its if set ['111111 i I 1 lull
h rcii7,
22?- his Count d oes, nor sound. in ln.mt , All o I the preceding afl ]c uitiinis ui Framid of
fraudulent conduct anchor motive are specifically excluded from this Count.
223. This Count is brought by Plaintiffs aguiint the Tyco DGfcnclwu,E:, with respect to
the Proxy Statement issued by AMP and Tyco on February 12. f 09 0 (dme "1'ru v") him vie 1. ti mis
ut'Scetiun5 14(a) w id Rule 14a-9 pioniulgated thereunder.
22.1- 'TThe Fvco Dcic:iciants caused to the issued or tic-iilitted a>>cl ,ic•yuic-,;ccd in clr
c01 n1r0 Ieui the issuance Of the ProxV.
74
J 0
223. In the Proxy, the Tyco Defendants rcilucste{!, among other 1hinus, that Plaintitf5
and other AMY stockholders, among others, vote to approve the merger agreement between
AMP uric! Tyco.
22b. The Proxy was materially false and m ii i slead ing because, as set lhrt } i above, it
omitted and/or tailed to disclose (a) information concerning the ialsificatiim of Tyco 's financial.
reporting, reported acquisition costs, and the purported success of its aequisitioii strategy; argil (h)
information concerning looting of tlIe ['t}nipany by its senior e5CeutIVe s W1 I0 were conducting
Tyco as a criminal enterprise.
227. As a result of the foregoing, the Tyco Defendants have violated Section 14(a) of
the 19 311 Act, 15 U-S.L'. § 78n( a), and Rule 1-Ia-1-1 promulgated thereunder by the SZ'C-
228• As a direct and proximate result ot'the 1'yco Deterxlanls' unlawful course of
conduct in violation of Sect inn 14(a) of'the 34 Act anti RNli: I4a-9l, Plainlit'fs hive: been dai>>age..d
and cuntinlie to he damaged in an aniouiit not yet /idly detcrmin,ible, 1)u t sal 1c:ost ita the amount X71
the tliftcrence between the current and/or sate value of Plaintit]s Tyco sham-es and the value of
those shares had the misrepresentations and cmrnissions had been accurate
COUNT Ill
VIOLATION OF SECTION 20(,i) OF ThIF 1934 ACT
RV THE IN[)IV11)L'AL DEFE1VDAN S
2.1). I'Ittintiffs repeat and re311ege each and C. Ve-y allegation above :s 11' faith its lull
herein.
2.30- This Co umit is brought by }11,aimitts on behalI- of thm niselses against the €i divvidual
l]ctcsxlaiits for violation of Secti o n 20(a) tzf'the 1934 Act.
4,77
23 1, The Individual Defend nts each acted as a controlling p cison u[' 1yen within the
nicailing of Section 20(a) of the 1934 Act, as alleged herein. By virtue n1'their e xecutive
positions, and/or position on the Company's Board of Directors, each had the lau4ker 10 in€lnerlce
amd control and did influence and control, directly or indirec tly, t e decision-making of the
Company, including the content and dissemination of the various statements that plaintiffs
contend are materially false and lllisleadirig . The Indiv idual Dcleiidailt :, were provided with or
had unlimited access to copies of the Company's internal reports, press releases, puhlic filings,
anal other statements alleged by plainti ffs tee he mislead Ing prior to and/or .slioriIy after these
stalcnlents were issued and had the ability to prevent the issuance of the siatcments or cause the
statements to he corrected.
23?. In particular, each of the Iilrlividuul Defndants had dirccl in olv'elncnt in the day-
to-day operations of the Company and, therefore, Iu e presuiiied to have had the I){ivver to control
or influence the particular trullsaetiuns givi ii g rise to 11 IC SltcLllltiCS violations as alleged lierei11,
especially by virtue o f their senior positions, and exercised the same,
233. The Individual Defendants knew, or should have known cif the violations of
Section 10(h) at the 341 Act as set forth in Count 1 above.
234. As set forth above , Tyro and the lndividnal Defendants violated Section 10(h)
ind Rule 1 Oh-5 by their acts and oniissionti as alleged herein. By vi, ( {lc of their lailsiti nus as
controlling persons of'Tyco , each of the Individuail Defend ants is I ANC 1)LlT S1l,Liii to 4Octi011 2f1{a}
of llie 1034 Act.
23^. As a direct and proximate result of the Imidividual Deleddants' uill,iwful course 0t
conduct. Plaintiffs have been daniagei and continue to be damaged in aim umouilt not yet fully
I6
determinable, but at least in the amount of the ditnialit ion of the value of their shores of-TYcu
stock, and/ or the clilti ;renec between the artificially inflated price at which they ,requi red l'yco
stock and the true value of such shares absent the rietbrrrI.3tlt ' uhilawfi l course ut'conduc't.
COUNT IV
VIOLATION OF SECTIO N II O F t'IIE 1933 ACTBY ALL Ufa THE DEFENDANTS
236. This Count is brought can behalf of Plaintiff's pursuant to Section 1 i of'the 1't33
A^cl, 15 [ f.S.C. § 77k, against all defendants -
237. This Count does nut sound in fraud. All of the preceding al]eg tic aty of fraud nr
Craudulc[st conduct. 311 drnr motive are specifically excluded from this ('aunt.
238. 'the Joint A1\71?/Tycs Pioxy Slateinent and Prospectus iilixl i[i I•ebruary 12, 10 99
in :,utrport rW tile proposed merger of thu two entities (the "Prcospeeius' 1 was I [taccu ratc and
misleading, contained untrue statements of material faits, omitted to sl[[tc other tint, necessary
to make the statements made nO t Ili is) earfine-, and Concealed and taaled auierl [[utrly tO d iselose
material facts as described above.
73-3. "the Company is the registrant fbr these u tlerinsvs. The Tvcuu I )efuiid;ntts signcd
ant-"or were otherwise responsible for the contents and dissemination (1 1, 111 Pros, pectus.
240. Pwi' consented to the inclusion Obits audit reports i[t the ('Lospcctt-[s, and to heinp,
na[ncLl therein as an expert. °
41. As issuer of the shares, Tyco is strictly liahlc to thv P1z1ij11l1 , l*S 101- tile
nnisstatentents arid urnistiion .s. Kozlowski, Swart' and Walsh an: jointly a[ld tievcralIy liable a
s i g natories of the registration statenment.
77
SC
r
242. None of the defendants nailed herein inadv a reaaonat)le irrvesIi :,Ltiott or
possessed reasonable grounds for the helici'that the statements eontaiiLed in the Prospectus were
true and without omissions of any material facts and were not m isleading.
7.43. Defendants issued, ca used to be issued and participated ill the i suttnce of
materia11v false and misleading written statements to the plaintiffs that ^^Lre conidijled ill tile
Prospectus, which represented or failed to disclose, among other things, the facts set forth ahove-
lay reasons of the conduct hercin alleged, each defendant violated, and/or (.onlroIIrd a person
who violated, Section l ] of the 1933 Act.
244. 111aiiidits acquired'I'uco shares pursuant to, or traceable to, rind in reliance on, th e
Prospectus.
245. 111aintiI s Iiavee sustaine d danmagcs. "i'he Value of Tyco shares tlec lined
Substantially subsequent to and due to defendants' Viol ati fns.
246. At time time they acLluired Tyco shares, 1)1aintitfs Were without kim wledge of the
facts concerning the wrongful conduct. less than two years elapsed from the lit]ie that Plaiiiiittti
discovered or reasonably could have discovered the facts upon which tllis Complaint is based lo
the lime that Plaintiffs tiled their Complaint. Less than Live years elapsed Iro>>t the trine Iha t the
securities upon which this Count is brought were bona /ule offered to 111e linle P1aintiPs Tiled
tiled' complaint.
7$
9 0
COUNT V
VIOLATION OF SECTION 12(a)(2) OF THE 1933 ACTBY THE TYCO DEFENDANTS
247- This Count is hrought on hehalf of PIainliffs pursuant to Section 1 a)(2) of the
1933 Act against the Tyco Defendants.
248_ This Fount does not sound in t'raud. All of the preceding rlllcratitius oHraricl or
fraudulent conduct and/or motive are specifically excluded from this Count.
249. The Tyeo Defendants were sel) ers, ofernrs, and/or solicitors of'salcs ofthe shares
otieretl pursuant to the Prospectus.
250. The Prospectus contained untrue st:atenlenl5 of material l'ats, ti,nsilted to state
011 1 0 - tarts necessary to make the statements made not mis leading, and ct uicealcnd and failed to
disclose material facts. The't yc o Defendants' uctiun cat sniiciiation il)JUded participating in tile
prclmr-atlon of the materially false and misleading Prospet:tus-
2S I - 'I'fic Tyco i )eFond ants owed to plaintiffs the rirlty to make a Mlst;ilable allrl
diligent investigation of the statements Coll talned I I I tale Plospectus to ins Lire that such statement.,
were true and that there was no untission to state a material tact rc&luired to he stated in order to
make the statements contained therein not rnisleacling. "l'he Tyco De1entlal,ls kricty ol, c,r in the
c_xc else ofreasonahle care should havoc known of the misstatc: iri cats ;rid urilissiun5 contained in
the Prospectus as set forth ahove.
252. PlaintitE purchased or other wise acquired Tyco shares IuusuKll;t to ur 11acea i?le to
the rlefoctive Prospectus. Plaintiffs slid not k;lcm,, or in the exercise of rc&;olta hli: diligence
could not have known, of the untruths and omissions contained In the fyr05lWc:tuti.
7 9
0S. 0
253. P1uintiffs offer to tattler to the Tyco Defeiulatits those Tyco securiti es that
Plaintiffs continue to own in return ii)r the consideration paid for those sccurlties together with
interest thereon,
254. By reason of the conduct alleged herein, (he Tyco Defendants violated, and/or
controlled a person who violated, Section of the 1933 Act. Accordingly . PlatntiIIs who
ho ldI Tyco shares purchased or acquired pursuant or traceable to Prospectus have the right to
rescind and recover the consideration paid for their Tyco shares and, heresy elect to rescind and
tendcs their Tyco shares to the Tyco Defendan ts sued herein , Plaintiffs kkhn Ila^e ' uhd their Tyco
shares are entitled to reseissory damages.
255. Less [prat live years elapsed horn the tinge that the securities upon which this
Count is brought were sold to the public: to the time of the filing of this action - Less than twwwo
years elapsed ii or tire time when IIlaintiI s discovered or reasonably could have discovered the
tack upon which this Count it based to the time of the tiling of this ac tion.
COUNT V1
VIOLATION OF 15 OF TIlt 19:3 ACI.
BY THE INDIVIDUAL DEFENDANTS
356- This Count is brought by Plaintitls puisuanlt to Section 15 oi'llic 1`)33 Act against
the Indiv idual Defendants.
257 This Ccuunt does not sound in fraud . A]1 of the preceding i1][egalions iif frond err
Iralitlulknt conduct and/or 111ntive are specifically excluded horn this, C'ount-
158. h.aeh of 6P -, Individual Defendants was a Co IItrol l''°' c)f ri't'e li y Virtue. of their
lsasilions as directors anclk r,is senior officers of 1'yco. The individual Defeiidai its each had a
80
0 4: r orseries of direct and/or indirect busit ess anchor petoonal rel ationships with n1hcr directors and/or
major shareholders olTyco.
259. hach of the Individual Defendants was a culpable participant in he violations of
Sections 1 1 and 12(a)(2) of the 1933 Act alleged in Counts IV and V uuhave. hared on their
having signed or participated in the preparation and/or dissemination of the Prospectus or having
otherwise participated in the process that allowed the merger to he sLw,csstidly compacted,
COUNT VII
COt 1MON LAW FRAUD AGAJ ST THIE TYCO DF,VF N13ANTS
260. 11laintifls repeat and reallcgc each and every allegation in the 1urcgniiig
para. raphs as if fill Iy set fort I herein.
-61, At all relevant times, the defendants knowingly made material, fl lsc
representations and/or omitted to state material facts necessary to make the statement:, made; not
niislea.cling in an effort to maintain artificially high market prices for I yco securities
2O2. The Tyco Defendants engaged and participated in a etintinuomis course of eoiiduct
to conceal adveise material inlojmaLion about the f'uinpuimv's [iniiitci<<I results, businesses,
operations, and prospects as specified herein and to falsely assure inve;sturs o l T vci11s earnings,
assets, rcvcuues expenses and the accuracy of the Company's financial repcutit t of perlonnrunc:e,
as set tifrth more particularly herein.
2{i3. The Tyco De fi nmlants n]ade the m isstatements and conn iissioonn.s I3e.sL:rihed hc+ a Vin
with knowledge or reckless disregard of their falsity. with the intent to ddraud mod with the
ptlrpasc Of inducing investors to purchase and/or retain their shares 01 'Fvctti stud,.
91
un
264. The 1'lainti115 ju tifiably relied upon the Tyco Dct'en[lants representations which
induced PIairit itls ti, purchase, or otherwise acquire , and retain their shares of Tyco stack-
?_6.i. As a direct m d proximate result of the Tyco Defendants' wrongful conduuct,
1'1driilt1fl5 suffcc red (I,IIII,t, .s.
COUNT VIII
NEGLIGEN'I' M1SREPIZ SEN 'i ATION AGAINST THE TYCO DEFENDANTS
2 0 6. I'hrindiifs repeat and reallcge each and every allegation in the foregoing
partig raphs as i i fully set forth herein.
20/, At all relevant times, the defendants knowingly made material. false
I cpresenl,itinns L=rld;ot (1111 itted to state material facts necessary to make the statements made not
IIII"Icading as set tfII 11t above. without reasonable ground for believing those statements were
I r%i e.
?6X. Tlhc'I'yco I)ufettdants engaged and participated in a continuous course of conduct
to corieeai adverse mr; tei ial inlorniatioit about the Cumpa:ry's financial results, businesses,
opertttinrts, and prospects as specified Herein and to falscly assure investors Tyco's earnings,
assets, revenues e x Iexpenses and the accuracy of the Company's financial reporting of pcrfomlanec,
as set h rtlt mare pariicuiarl_vlicrein. ,
269. f'hc r'yco Defendants made the misstatements and omissions described herein
with the intcnl to induce and the expectation of inducing investors, including the Plaintiffs. to
rely upon those st:ttc.mCT its and with the knowledge that investors, including the P1 ainti Ifs would
rely upon those statements in deciding whether to buy, sell or retain their Tyco shares.
82
140
70. Plaintiffs iustifiably relied upon the Tyco Defendants representations which
induced 111aiIItif-fs to 11uielta.w, or atlieru ise acquire, and retain their shares of Tyco stock.
In addition to the duties of full disclosure imposed upon the Tyco Defcncianls as a
IL:srrli ,rl:!11eir I]lalkiq.; a f'tirlnirrlivc statcttieniti arrd reports, or participatio n in the nia kiiig ref
a],fill niativ e stateiiieiiis and reports to the lilvesting public , they had a duty to promptly
disseniinato truthliii information that would be material to investors, including Plaintiffs, in
eotnpliance with GAAI' and the integrated disclosure pro visions of the SEC as embodied in SEC
Regulations S-X 117 C.F.R. § 210.01 ct se(l.) and S-K (17 C.F.R. § 229.10 et seq.) and other SEC
regulations , includitig liiilli i.11, coo plet,e and accurate information with resp ect to the Company 's
olJeratioIIs mid pcrti^rtnatice so that the market prices of the Company's publicly traded securities
\vould he based on truthful, complete and accurate information.
271 As a direct and proximate result of the Tyco Defendants' wrongful conduct,
l'lainlit'fs suffci-c'i dainagc.s,
PRAY IR FOR RELI E;F
WHEREF01LF, Phdntifls demand judgment:
A. awarding compensatory damages and/or recission as appropriate against Dcicndarits
,irul cm.h of then, it favor of PlaiIll iA's fhr damages sustained as a result of Defendants'
\vro11tdoing;
13- ,ardiii p, extra,irdirnary, equitable and/or 1njiIrlcti -e relief as permitted by law
(including but not limited to disgorgement);
93
S
cC. awarding Plaintiffs their costs and disbursements of this suit, including reasonable
atto ncys' fees, accountants' fees and experts' fees, and
D. awarding such other and further relief a s may be just and proper.
JURY TRIAL
Plaintiff's hereby demand a trial by jury.
Dated: January 19, 2003
BRAGAR EXLER EA(iEL & MORCF.N 5'i'ERN, d.i.P
By:
Pe D. Morgenstern (PM-5021)
)rv A. Blue (G13-9569)a ebber- Piteock (KP-9576)
885 Third Avenue, Suite 3040New York, NY 10022(212) 308-5858Fax: (212) 486.0462
;,..° 84