In Re: Tycom Ltd. Securities Litigation 03-CV-01352-Consolidated

a OWT N: . UNITED STATES DISTRICT COURT DISTRICT OF NEW DN13 01 M 104

In re Tyco International, Ltd. MDL Docket No. 02-1335-B Multidistrict Litigation (MDL) 1335

0 This Document Relates to: Docket No. 03-CV-1352 Rosemarie Stumpf v. NO R. Garvey, et al.

[In re 'hCM Ltd Sec^'tiea ------

CONSOLIDATED SECURITIES CLASS ACTION COMPLAINT

Lead Plaintiff Mark Newby (`plaintiff'), individually and on behalfof all similarly O sided, by his attorneys, alleges the following upon information and belief, except f4 paragraph

24, which is alleged upon personal knowledge. Plainti$°s information and belief is b sad on the

0 investigation ofhis counsel, including a review of Tyco International Ltd. ("Tyco") a'd TyCom

Ltd. "s ("TyCom") publicly issued press releases; filings with the Securities and

Commission ("SEC"), including the Registration Statement and Prospectus filed with the SEC on O July 26, 2000; news stories; analysts' research reports concerning Tyco and TyCom;

of former employees of Tyco and TyCom; internal TyCom docuamts; complaints, and

O reports ofthe SEC and other governmental bodies; market research data; and data

trades in Tyco and TyCom securities.

Included among the former TyCom employees who provided information in this C Complaint are:

Employee A -- Senior Strategic Information Manager from 1999-2000.

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Employee B - President of a TyCom Operating Division with extensive prior

at AT&T and Bell Labs.

Employee C - Project Manager at TyCom's Morristown facility.

Employee D - Deputy Director of Global Sales from 1997-2004. 0 Employee E -- TyCom Senior Director of Global Services from 1999-2002 at' !a

Morristown Facility.

Employee F - Project Manager at TyCom's Clark facility.

Employee G -- Shore End Installation Engineer who worked at one of TyCom' splants

between January 1997 and August 2002.

Employee I - Director of Technology at TyCom's Clark facility.

p Employee J - Terminal Engineer from January 2000 to April 2002.

Employee K - Senior Manager - Terminal Commissioning and Ndwork Deal at

Morristown from 1997 to September 2002. 4

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p NATURE OF THE ACTION ...... 5

JURISDICTION AND VENUE ...... 11

PARTIES ...... 12 p PLAINTIFFS CLASS ACTION ALLEGATIONS ...... 15

SUBSTANTIVE ALLEGATIONS ...... 18

B. Tyco Decides to Spin OffA Minority Interest of TyCom ...... 19

C. James Bran= - the TyCom Emplgyee With Pri.mary Responsibility for the Offering - Had Been Previously Convicted of Bank Fraud ...... 22

D. TyCom Experienced Limited Demand for Bandwidth Prior to the Offering ...... 24

E. The False Yankee Group Forecasts ...... 28

F. The TyCom Public Offering ...... 31

G. The Prospectus Was Materially False and Misleading ...... 36

1. The Prospectus Misrepresented that Demand for Bandwidth Was In= easing ...... 36

2. The Prospectus Miaepresented The Yankee Group's p Projection of Market Demme and Failed to Disclose That TyCom' s Internal Projections Were Substantially Lower ...... 39

3. The Prospectus Mid the Individual Defendants' Executive Compensation and Failed to Disclose That Kozlowski and Swartz Were Sy cally Looting Tyco ...... 40

4. The Prospectus Failed to Disclose that the Individual Defendants Were Financially Motivatad to Use the Proceeds ofthe Offering to Satisfy Their Unauthorized Loans ...... 42

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5. The Prospectus Failed to Disclose That The Reported Success of Tyco Was the Result of Systematic Accounting Manipulations, Including the Manipulation of the SSI Acquisition ...... 45

6. The Prospectus Misrepresented the Identity ofthe Members of TyCom's Executive Malt and Failed to Disclose Brennan's Active Participation in the Offering and Criminal 0 Record of Bank Fraud ...... 49 7. The Prospectus Failed to Disclose Pervasive Analysts' Conflicts ..... 50

a. Goldman Sachs ...... 50 0 b. Salomon Smith Barney ...... 53

H. Trading In TyCom Common Stock After the Offering ...... 58

1 The Underwriter Defendants' Materially False and I Misleading August 21 , 2000 Analysts' Research Reports ...... 59

2. TyCom Engaged in Fraudulent Revenue Swaps to Inflate Revenue and Profit ...... b2

3. TyCom's Materially False and Misleading January 29, 2001 Proxy Statement ...... 7

I. TyCom Experiences A Decline In Stock Pace As Information Enters the Market of An Oversupply of Bandwidth ...... 71

F J. Subsequent Events Reveal Duets' Misconduct ...... I ...... 76

K. Additional Scienter Allegations ...... I ...... 83

COUNTI ...... I...... 96 0 Aamnst All for Violation gf Section 11 and Against T . , im-thWi1ndividt> is for Violation of Section 15 0 the ties Ac^ . 86

COUNT II ...... 88 Against All 0 Debts (Other Than Merrill Lynch) for Violation of Section 10(b) and Against Debts Tyco and the Individual Defendants for Violation of Section 20(a) ofthe Exchange Act ...... 88

PRAYER FOR RELIEF ...... 91 0

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1. Plaintiff brings this action as a class action on behalf of himself and all other

persons or entities who purchased shares of TyCom common stock pursuant to or traceable to the

July 26, 2000 Registration Statement and Prospectus ("Prospectus") for TyCom's init al public o offering (the "Offering") or who purchased TyCom common stock on the open during the

period July 26, 2000 ftmigh December 17, 2001 (the "Class Period") and were dame ed thereby

O (the "Claw"), to recover damages caused by defendants' violations of the federal secu^rities laws.

Named as defendants are Tyco and TyCom; L. Dennis Kozlowski, Mark H. Swartz, mid Neil K

Garvey (the "Individual Defendants"); and Goldman, Sachs & Co., Merrill Lynch & o., and O Salomon Smith Barney Inc., the three co-lead underwriters of the Offering (the "U 'ter n ab.

2. Plaintiff alleges a scheme among the defendants to reap over $200 million in cash

from the July 26, 2000 initial public offering of common shares in TyCom Ltd., a wholly-owned

subsidiary ofTyco International Ltd. TyCom was, at the time ofthe Offering, a service

corporation that primarily built mxkmm fiber-optic cable networks for third parties, such as

Global Crossing Ltd., 36 ►orks Inc., and Level 3 Communications Inc.

3. Individual Defendants Kozlowski and Swartz were at the time ofthe Oftering, in

July 2000, indebted to Tyco for tens of millions ofdollars of prized loans. The ndividua,

Defendants saw the Ogg as an opportunity to generme a pool of fib money to to

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4. The Underwriter Defendants, and their principal investment bankers aid research

10 analysts, had reaped, in the late 1990s and early 2000, tens of millions of dollars of from

initial public offerings of internet and telecommunications companies.

5. By mid-2000, through money raised by the initial and secondary oftheir 10 telecommunication clients, hundreds of thousands of kilometers of undersea was laid

and was sitting mostly dormant under the sea. lO 6. Although undisclosed to the public, there was little demand for this and by mid-2000, pricing of bandwidth and the market prices ofthe companies brought by the

Underwriter Defendants in the late 1990s and early 2000 were both declining. By 1© telecommunications companies had resorted to swapping bandwidth capacity among other

to continue to report increasing revenue. Recognition of revenue on those swaps

generally accepted accounting principles, and the telecommunications companies did disclose

that the reported "revenue" was generated by swap transactions instead of actual sales of

bandwidth capacity.

Q 7. According to confidential former TyCom employees, described herein, the

engineer ofthis scheme was Jack Grubman, the lead telecommunications analyst at

Smith Barney. Grubman had, according to those sources, convinced his willing D (Kozlowski and Swartz) to spin off a minority interest of TyCom in a July 26, 2000

offering to generate over $2 billion in proceeds.

8. Gnibman, working with TyCom's senior most executives, devised a

plan, created through a mark-up of Global Crossing's business plan, for TyCom to and own

an additional 250,000 undersea kilometers of bandwidth.

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9. Also assisting in this enterprise was James F. Brennan, a senior TyCo1n officer 0 hired personally by Kozlowski and charged with primary responsibility for coordinat^ng this

enterprise. Brennan was a convicted bank felon, who had previously served 41 monts in prison.

United States District Court Judge Mark L. Wolf, in sentencing Brennan to the

sentence possible under federal guidelines, called Brennan a "dangerous man, who

continue to try and make his fortune by lying if not &wterred." Brennan, accordingly, vwas the 0 perfect accomplice to Kozlowski, Swartz, and Grubman to take TyCom public.

10. The TyCom business plan and Offering were constructed for the purpose of

reaping the proceeds ofthe Offering, with indifference to whether there was demand kor more a bandwidth and despite defendants' knowledge that there was already a surplus

supply.

0 11. The scheme worked like a charm. By virtue of the misrepresentations

omissions in the Prospectus with regard to existing demand for the new TyCom G1obI Network

("TGN"), defendants were able to successfully launch TyCom's Offering. 70.3 millio n sheres O were issued in the Offering, for gross proceeds of $2.24 billion.

12. Individual Defendants Kozlowski and Swartz utilized $95.5 million oil Offering a proceeds to satisfy their publicly undisclosed outstanding relocation loans.

13. The Underwriter Defendants, who received an underwriting discount of $1.60 per

share (5% ofthe $32 offering price), generated fees of $112.8 million from the Offeri 0 excluding additional millions of dollars of profits from brokerage commissions and fe^s on open

market post-Offering trading. The Underwriter Defendants, through the exercise of t1 a 9.2

C million share over-allocation option at $32 per share, when TyCom Mock was publicll trading

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above $36 per share, were further able to allocate $40 million of guaranteed profits their

Inc.).

O 14. TyCom's public investors, of course, fared for worse, losing over one

dollars from their investments in TyCom common stock as the public markets came to realize

that there was an extraordinary glut ofbandwidth capacity.

15. Defendants' scheme was not publicly revealed until the fall of 2002 2003

when Kozlowski and Swartz were subjected to criminal proceedings for having loo Tyco (and

TyCom) and later, Grubman was suspended for life from the securities industry. Biuman has

fled the United States and currently resides in Ireland.

16. In an effort to recover defendants' ill-gotten gains, plaintiff alleges, in $bis action

0 among other things, that the July 26, 2000 Prospectus for the Offering was materially false and

misleading in the following respects:

a. The Prospectus misrepresented that demand for bandwidth was inc> ing and

failed to disclose that bandwidth capacity already exceeded demand and was

projected to continue to increase at a faster rate than demand. The Pmqmtus

D further failed to disclose that (i) substantially less than 10% of existing bandwidth

capacity was being utilized, (ii) pricing for fiber-optic capacity was kn within

TyCom to have plummeted and was projected intemally by TyCom to Dntinue to 0 plummet, (iii) TyCom had falsified its business plan and revenue lions at the

direction ofthe Underwriter Defendants to make the Offering atd to

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0 potential investors, and (iv) TyCom had experienced no demand for sale of a bandwidth capacity on the TGN.

b. The Prospectus misrepresented that The Yankee Group had determit that

demand for bandwidth was expected to grow at 123% (transatlantic) d 129% 0 (transpacific) annual rates from 2000 through 2005 and failed to disc a that (i)

TyCom's internal estimates of demand for bandwidth (66.25% were 0 significantly lower than The Yankee Group's estimates; (ii) The Ya Group's

actual estimated growth rate as established by internal TyCom docu its was

71% (transatlantic) and 85.75% (transpacific); and (iii) The Yankee had 0 mp internally projected that pricing for bandwidth capacity would plum The

Prospectus also failed to disclose that The Yankee Group's projections were based

Global Crossing, Qwest, and Level 3, who were using non-cash swaps of capacity

between end-users to inflate reported revenue and customer demand

bandwidth.

c. The Prospectus misrepresented the Individual Defendants' executive

C9 compensation as senior officers and directors of Tyco and TyCom and filed to

disclose that the Individual Defendants had granted themselves, withoi Board

approval, or public disclosure, as required by SEC regulations, tens of illions of

dollars of "relocation loans" and other unauthorized payments.

e. The Prospectus represented that $200 million ofthe offering proceeds Auld be

Q paid to Tyco but failed to disclose that the Individual Defendants' i

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C motivation for the Offering was to use its proceeds to award 1

0 unauthorized bonuses to retire unauthorized relocation loans.

f. The Prospectus represented that Tyco had the power to control TyCor 's

operations and would provide financial and accounting services to T om, but

failed to disclose that Tyco had been able to report improved earnings only

through a series of accounting manipulations (subsequently revealed ii i Tyco's

g. The Prospectus represented that the Underwriter Defendants had

provided investment advisory services to Tyco and TyCom, but failed disclose

that the Underwriter Defendants had pressured their telecommnaicati analysts,

who had privately turned bearish on the telecommunications industry, ^o maintain

telecommunications industry to secure additional investment banking

assignments, such as the TyCom offering. Those misleading t research 1© reports had inflated all telecommunications stocks, including the offering

price of TyCom common stock.

Q h. The Prospectus purportedly identified the most senior TyCom a s involved

in its business, but failed to disclose the central role ofJames F. n, a senior

member of TyCom management, to avoid disclosing that he was a icted bank 1C felon.

17. Defendants continued their misconduct during the Class Period by

10 misrepresenting that there was demand for TyCom's products, and through the by the

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Underwriter Defendants of research analyst reports (including reports written by

projecting substantial appreciation in the market value of TyCom common stock.

18. Plaintiff asks this Court to find defendants liable for their misconduct with regard

to the Offering and their continued false and misleading statements during the Class 0

19. This action arises under Sections 11 and 15 ofthe Securities Act of 103 (the

0 -Securities Act"), 15 U.S.C. §§ 77k and 77o, and Sections 10(b) and 20(a) of the

Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a).

20. In connection with the acts alleged herein, the defendants directly or 0 used the mom and instrumentalities of interstate commerce, including the United St s mails

and facilities of a national securities exchange.

0 21. Jurisdiction is conferred upon this Court by Section 22 ofthe Securitids Act, 15

U.S.C. § 77v, Section 27 ofthe Exchange Act, 15 U.S.C. § 78(aa), and 28 U.S.C. § 1$31 (federal

question jurisdiction). This Court has personal jurisdiction ofthe defendants pursuant to Section 0 22 of the Securities Act, 15 U.S.C. § 77v and Section 27 of the Exchange Act, 15 U.S.C. §78(u).

22. This litigation was originally filed in the District ofNew Jersey, wher* TyCom a and Tyco maintained offices and operations during the Class Period. Many of the act and

transactions constituting defendants' violations of law occurred within that District, icluding the

preparation and dissemination of materially false and misleading financial statements a corporate documents.

23. In its Order entered December 30, 2003, the Judicial Panel on Multidi ict

Litigation transferred this Action to this District for coordinated pre-trial proceedings.

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24. Lead Plaintiff Mark Newby purchased 1,000 shares of TyCom i stock

pursuant to the Prospectus on TyCom's July 26, 2000 initial public offering and 1 shares on

the open market on July 27, 2002. Mr. Newby was appointed Lead Plaintiff by of the U.S. O District Court for the District of New Jersey, dated November 3, 2003.

25. Defendant TyCom was incorporated by Tyco as a Bermuda i on March

0 8, 2000, under the laws of Bermuda as a wholly-owned subsidiary to serve as the

company for Tyco' s undersea fiber optic cable communications business. According 0 the July

26, 2000 Prospectus, TyCom was, at that time, "a leading independent provider fiber O optic networks and services."

26. Defendant Tyco is a diversified manufacturing and service corporatioi organized

O and existing under the laws of Bermuda with offices located throughout the United At all

relevant times, Tyco manufactured, serviced, and installed electrical and electronic

undersea telecommunications systems, and fire protection and security systems. the Class 0 Period, Tyco owned 86% of TyCom's common shares outstanding.

27. Defendant L. Dennis Kozlowski was at all relevant times the Chairman

O and a Director of TyCom, and the President, Chief Executive Officer and Chairman the Board

of Directors of Tyco.

28. Defendant Neil R. Garvey was at all relevant times the President, ChiefExecutive a Officer, and a Director of TyCom.

29. Defendant Mark H. Swartz was at all relevant times a Vice President aid a

O Director of TyCom, and the Executive Vice President and Chief Financial Officer of'tyco.

Doc#:115334 V#:1 3053:1620 12 30. The Individual Defendants each signed the Registration Statement for a Offlering

31. Defendant Goldman, Sachs & Co. is a Delaware corporation with

offices located at 85 Broad Street, New York, NY 10004. Goldman Sachs is a global investment

banking and securities firm that, among other things, offers underwriting services to 'es

seeking to sell their securities to the public. In addition to its investment banking operations,

0 Goldman Sachs offers extensive services to its institutional investor clients and its ate wealth

went clients (principally high net worth individuals), has an active securities sales and

trading business, and maintains a separate division to perform research on equity

32. Defendant Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch")

is a Delaware corporation with executive offices located at 4 World Financial Center, New York, a NY 10080. Merrill Lynch is a financial management and advisory company that

commercial, investment banking, and underwriting services.

33. Defendant Salomon Smith Barney Inc. ("Salomon"), which was

Citigroup Global Markets, Inc. subsequent to the Class Period, is a Delaware corporation with

executive offices located at 388 Greenwich Street, New York, NY 10013 . Salomon was, at all

0 relevant times, a financial services institution that, through its subsidiaries and

provided commercial and investment banking services to corporate entities.

34. The Individual Defendants, as officers or directors of a company regist red with

the SEC, the common stock of which was traded on the New York Stock Exchange

and governed by the provisions ofthe federal securities laws, were, during the time rel^evant to p this Complaint, "controlling persons" of TyCom within the meaning of Section 20(a) ^f the

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Exchange Act and Section 15 of the Securities Act, and had the power and influence, which they

exercised, to cause TyCom to engage in the unlawful conduct complained of herein.

oftheir direct and substantial management and Board positions and responsibilities, I

Individual Defendants were able to and did, directly and/or indirectly, in 0 whole or in part, control the conduct of TyCom's business and the information about its business in

its public statements and filings with the SEC. Throughout the Class Period, the Indijvi 0 Defendants were provided with copies of, reviewed and approved, or signed the

Statements for the final and draft Prospectuses, press releases, and other

reports prior to or shortly after their issuance, and had the ability and opportunity to their L issuance or to cause them to be corrected. As a result, each ofthese Individual was

responsible for the accuracy of the public reports and releases detailed herein, and is

responsible and liable for the representations contained therein.

35. Tyco, as the 100/ shareholder of TyCom prior to the Offering, and 86%

shareholder of TyCom after the Offering, was a control person of TyCom and the Ind 0 Defendants and had the power and authority to direct their conduct prior to and durirt the Class

Period. The Prospectus (at 13) acknowledged that "Tyco has significant control over and may

0 not always execute its control in a way that benefits our public shareholders."

36. It is appropriate to treat the Individual Defendants as a group for

purposes and to presume that the false and misleading information conveyed in is public

filings, press releases and other publications as alleged herein are the collective ofthe

Individual Defendants. Each Individual DefendaK by virtue of his high level within

0 TyCom, directly participated in the management of the company, was directly in the

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day-to-day operations ofthe company at the highest levels, and was privy to

proprietary information concerning the company and its operations, finances, financiill condition,

products and business prospects, as alleged herein. The Individual Defendants were ^nvolved in

0 drafting, producing, reviewing or disseminating the false and misleading statements herein, and approved or ratified these statements.

37. As direct participants in the wrongs complained of herein, TyCom, th^ Individual O Defendants, Goldman Sachs and Salomon Smith Barney are liable for the damages suffered by

Plaintiff and other purchasers of TyCom securities during the Class Period for their v4oletions of

Section 10(b) ofthe Exchange Act, and Rule I Ob-5 promulgated thereunder. All O Defendants (other than Tyco) are liable for the damages suffered by the Class during he Class

Period for violations of Section 11 of the Securities Act. Tyco and the Individual Defendants are O liable for the damages suffered by the Class as control persons for violations of 20(a) of

the Exchmp Act and 15 ofthe Securities Act.

O 38. Plaintiff brings this action as a clams action pursuant to Rules 23(a) and 23(bX3) of

the Federal Rules of Civil Procedure, on behalf of all persons or entities who purches^d shares of a TyCom common stock pursuant to or traceable to the July 26, 2000 Prospectus for th Offering,

or who purchased TyCom common stock on the open market during the Class Period tjuly 26,

2000 through December 17, 2001, inclusive) and were damaged thereby. Excluded fr n the O Class are the defer, officers anddirectors of Tyco, TyCoam, or the U e r

members ofthe immediate fm'mily of each ofthe Individual Defendants, and affiliates 4fthe

O corporate defendants.

DOW: 145334 Vs #:I 3033:1620 is 39. The members of the Class are so numerous that joinder of all mem is

impracticable. TyCom had over 70 million shares outstanding during the Class Perio . While

the exact number of Class members is unknown to plaintiff at this time and can only

ascertained through appropriate discovery, plaintiff believes there are hundreds ofm bars of

the Class. TyCom's common stock was actively traded on the New York Stock Exc

throughout the Class Period.

40. The names and address of the Class members can be ascertained from he books

and records of TyCom or its transfer agent or the underwriters of the Offering. Notic can be

provided to such record owners by a combination of published notice and first-class , using i0 techniques and a form of notice similar to those customarily used in class actions ark under

the federal securities laws.

0 41. Plaintiff will fairly and adequately protect the interests of the members ofthe

Class. Plaintiff has retained competent counsel experienced in class action litigation 4nder the

federal securities laws to further ensure such protection; he is a member ofthe Class; is claims 4 are typical of the claims of all Class members; and he does not have interests antagon 'c to, or

in conflict with, those of the Class.

® 42. Plaintiff' s claims are typical of the claims of other members ofthe Cla4s because

plaintiff' s and all the Class member's damages arise from and were caused by the sane false and

misleading representations and omissions made by or chargeable to defendants. G 43. A class action is superior to other available methods for the fair and

adjudication ofthis controversy since a multiplicity of actions could result in an a burden on the court system and could create the possibility of inconsistent judgments.1

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44. Moreover, a class action will allow redress for many persons whose claims would

otherwise be too small to litigate individually. There will be no difficulty in the manqpnent of

this action as a class action.

45. There are numerous questions of law and fact which are common to Class and

which predominate over any questions affecting individual members ofthe Class, inc uding:

a. whether the federal securities laws were violated by defendants' acts alleged

herein;

b. whether the Prospectus omitted or misrepresented material facts cons (i) the

business operations, finances and prospects of TyCoin; (ii) the executi ]a compensation of Tyco' s senior manag nent and Board members; and

defendants' reasons for having conducted the Offering of a minority ii of

IG TyCom common stock.

c. whether TyCom, the Individual Defendants, Goldman Sachs, and Smith

Barney acted intentionally or recklessly to defraud investors; 10 d. Whether the Individual Defendants or Underwriter Defendants ex due

diligence sufficient to have determined the true fats; and

1© e. whether members of the Class were damaged by virtue oftheir inr in

TyCom common stock during dw Class Period, and if so, the app re measure

of recovery. l0

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46. Prior to April 1997, Tyco operated a Simplex Technologies unit primary

business was undersea fiber optic telecommunications cable. At that

Simplex's primary customer was AT&T Submarine Systems Inc. ("SSI"), whose prix

business was designing and laying undersea cable systems to link to terrestrial (land)

systems.

47. On April 11, 1997, Tyco and AT&T issued a joint press release stating that Tyco

had entered into an agreement with AT&T to acquire SSI for approximately $850 Tyco Q stated in that release that SSI would operate in conjunction with the Simplex unit to a

fully integrated manufacturer, designer, and servicer ofundersea fiber optic cable

48. On July 1, 1997, Tyco completed its purchase of SSi. In a joint press

issued by Tyco and AT&T, defendant Kozlowski stated that "[t]he combination ofof Simplex

Technologies unit and SSI creates the world's only integrated source for undersea fib optic a telecommunication cable systems including cable system design, manufacturing, inst ration and

service." Tyco referred to the combination of SSI and Simplex as Tyco Submarine S: terns Ltd.

0 ("Tyco Submarine"). Tyco was the 100% stock owner of Tyco Submarine. Tyco Sul 3adne was

subsequently renamed TyCom in connection with the Offering. Tyco Submarine and yCom are

referenced herein collectively as "TyCom." G 49. Tyco's merger of Simplex and SSI was perfectly timed to benefit from he growth

in telecommunications companies that were interested in owning undersea cable and

Q internet and telecommunications companies that were their customers.

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50. TyCom, which reported on a September 30 fiscal year, experienced wth in

revenue from $375.5 million in fiscal 1997, to $1,281.6 million in fiscal 1998, $1,63'F.6 million

in fiscal 1999, and $1 ,275.8 million in the first six months of fiscal 2000.

51. TyCom' s growth was primarily fueled by cash raised by its largest in

securities Underwritten by the Underwriter Defendants (Lg. Level 3 Communicatio $3.9

billion raised through public offerings in March 1999 and February 2000 underwritte by

O Salomon Smith Barney; 360networks, $590 million raised through an initial public o fering in

April 2000 underwritten by Goldman Sachs; Global Crossing, over $7 billion raised

stock and bond offerings underwritten by Salomon Smith Barney and Goldman Sao ; Flag Ci Telecom, $635 million raised in an initial public offering in February 2000 underwrit by

Salomon Smith Barney). The moneys raised in those offerings were utilized by those companies

O to employ TyCom to build out their underwriter fiber optic cable networks.

52. According to former managementlevel employees of TyCom, the decision to spin

off a minority interest of TyCom and build the TyCom Global Network was made in the fall of

1999, shortly after TyCom hosted an open house at its Eatontown, New Jersey facility for d telecommunication research analysts.

53. Employee A, a Senior Strategic Information Manager for TyCom from 1999-2000,

was a core member ofthe team that authored the business plan for bringing TyCom C•1 Employee A was responsible for developing demand models to forecast traffic and m cet share

along proposed network routes. Employee A reported to Andrew Kowalik, TyCom's lead of

0 Strategic Information, during the course ofhis employment with TyCom.

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54. According to Employee A, during the open house for analysts, Jack Gubman, a kQ senior equity analyst with Smith Barney, approached Nell Garvey and James Brennan, who was

then TyCom's Managing Director for Global Marketing and Business Development, ind told

them that Tyco 0 should spin-off TyCom as part of a plan to construct Tyco's own undersea fiber-optic cable network so that Tyco and TyCom could "retain the profit"

themselves from owning a fiber-optic network and selling bandwidth capacity on that network. a Employee A was present at that meeting and heard Giubman's statements.

55. Employee B was at the time ofthe Offering the president of a TyCom

division. Employee B worked for over ten years with divisions of AT&T and Bell Las, prior to C the acquisition of those divisions by TyCom. Employee B was actively involved in tl4c business

plan for the Offering.

0 56. Employee B corroborated that in September or October 1999, TyCom

telecommunications research analysts in the lobby of its Eatontown, New Jersey facility. At that

conference, Jack Grubman, Salomon Smith Barney's top telecommunications ana1yst,^ told

Garvey and Brennan that they "should get a handle on the company's hidden value" a4d "turn all

of it into gold." Employee B was present during those conversations.

57. Grubman was the primary telecommunications industry analyst at Salo4non and a

managing director until August 15, 2002, when he resigned from Salomon amidst accisations of

fraudulent conduct. Salomon reportedly earned more than $856 million in investment banking Q fees from 1999-2001 from telecommunications companies that Grubman covered. Sa^omon's

fees for that period were over 40% greater than those of its closest rival in the

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telecommunications industry, Merrill Lynch. According to the New York State A 0 General, Grubman earned an avenge of $20 million a year between 1999 and 2001.

58. Grubman was permanently barred from the securities industry in 2003 for

providing research 0 misleading in connection with his coverage of telecommunicatistocks. 59. Employee C, a Project Manager at TyCom's Morristown facility, also that

the analysts -- primly Goldman and Salomon - were pushing Neil Garvey to take 4s public, saying that Garvey could make a lot of money. Employee C was present during those

conversations.

60. Shortly after the fall 1999 conference, TyCom's most senior executive, including

Kozlowski, Swartz, Garvey, Peter Runge (TyCom's Vice President - Research and

and Chief Technical O m), James Brennan, and Stanley Kramer (a Managing Dire or in

0 Global Sales), attended a weekend meeting at TyCom's Patriot Plaza facility in Momi town, New

Jersey to plan the Offering. According to Employees B and C, who were present at t at meeting,

the TyCom executives put together the entire TyCom business plain during that single

61. Employee H, a Global Financial Analyst who worked for T yCom from 1998-

2002, was subsequently informed by his supervisor, who was present at the meeting, tat rather

than designing a business plan specifically suited for TyCom, the executives "bootlegged" copies

of Global Crossing's business plan and made a few adjustments to make it appear tha# the 0 business plan had been created for TyCom.

62. Once the plans to spin off TyCom were under way, according to Employee D, the

1.1 Deputy Director of Global Sales (from 1997 - 2004) at TyCom's Morristown

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Garvey conducted "townhall meetings" at TyCom' s various locations to increase loyees'

awareness of the TyCom Offering. In one such meeting witnessed by Employee D, Garvey stated

it was time for all the employees to get rich and it was "their turn to make a million."I Garvey

0 referred in those presentations to investors who had made money in other

companies that Salomon had taken public. Grubman had initiated coverage with ratings on

each ofthose companies.

C. Jasass. B^ - the TyC©m Employee With Pri ► i y for the - Had Be= hmft& of B=k Fr a

63. According to Employee A, James Brennan (TyCom's senior mark director) fl was the key TyCom person in the Offering. Brennan is described on his current e >yer's

website (Corvil) as having been "responsible for the research and modeling ofthe ;om Global

Network that was the foundation of the TyCom initial public offering." 0 64. In 1990, Brennan was convicted ofbank fraud for obtaining bank from

CambridgePort Bank totaling in excess of $2.2 million under false pretenses. other

0 things, Brennan was convicted of (i) falsely securing loans through nominees, (ii) viding false

financial statements claiming to have income over $500,000, while he actually made ass than

$6,000, (iii) concealing $8 million ofother personal loans that he had obtained from

individuals, and (iv) making loan repayments with bad checks.

65. Brennan was sentenced to a 41-month term by District Court Judge L. Wolf

C ofthe District of Massachusetts - the longest term permissible under federal guidelines. In his

sentencing order, Judge Wolf described Brennan as a "dangerous man, who would rootinue to try

and make his fortune by lying if not deterred." Judge Wolf enhanced Brennan's sent4ce two 0

Doc#: 145334 VeW:13053:1620 22

0 ©

levels for obstruction ofjustice for'perceived perjurious testimony" at the criminal t and 0

66. The First Circuit Court of Appeals, in its decision affirming Brennan'] conviction,

stated, among other things, that "Where was overwhelming evidence to support 0 [the Court' s] findings of Brennan's perjurious testimony at trial." L 994

F.2d 918, 930 (1' Cir. 1993). v 67. According to TyCom's former employees, Kozlowski took a personal nterest in

the success of the offering and hired Brennan directly as his envoy to work for TyCo kon the

Offering shortly after Brennan completed his criminal sentence. Although the Prosp :tus nand C and described members of TyCom's senior management, Brennan was not reference in the

Prospectus so as not to alert investors to his criminal background. Employees A and I

C confirmed that Brennan's omission from the Prospectus was intentional to conceal hi criminal

past. Employee B stated that Brennan was referred to at TyCom as "Mr. Evil."

68. Brennan's misdeeds continued after he left TyCom. Brennan was hire I in 2003 0 by the Golf Club ofNew England, as General Manager to oversee construction. The if Club

had been founded by wealthy New Hampshirers, including Craig Benson, the ofNew

0 Hampshire, John Kehoe Jr. of General Chemical Group, Stephen Foss of Foss wturing, a

former Tyco board member, Neil Garvey and Dennis Kozlowski.

69. The Golf Club filed for bankruptcy in February 2004, less than a year fter its 0 opening. Brennan had reportedly authorized over $25 million in estpenses and the Golf

Club to numerous lawsuits by contractors involved in building the Club. Bp's vat of

G $25 million of construction costs was subject to scrutiny inasmuch as the O:d value of

DOWN: 145334 Vei#:1 30531610 23

0 v

the Club in the bankruptcyproceedings was only $11 million. Brennan subsequently left the

0 United States and resides in Ireland.

70. Employee B stated that after Atlantic Crossing (AC-1) was installed b TyCom for

Global Crossing in May 1998, there was more than enough bandwidth available to handle

demand. "Dark fiber," as opposed to "lit fiber," is fiber that is laid undersea but not

connected to land, primarily because of a lack ofdemand. Most ofthe fiber that was aid by

TyCom and other companies in 1999 and 2000 was dark at the time ofthe Offering a> d awaiting

O demand for capacity, and is still dark.

71. Employee B said that the success of the Offering and proposed TON

Global Network) were based on pure speculation of future growth. Employee B stated that there

0 was nothing on paper or in contracts that indicated that there was a significant need for more

undersea cable services. According to Employee B, the only demand that TyCom

for the TGN at the time ofthe Offering was from companies, such as Qwest, Global

and Level 3, who themselves had excess bandwidth capacity and were interested in

their excess capacity for capacity on the TGN. Swaps are transactions in which two

Q exchange capacity on each other's network.

72. Qwest, Global Crossing and Level 3, along with other companies whole auditor

was Arthur Andersen, and investment advisor was Jack Grubman of Salomon Smith 0 treated the capacity transferred on those exchanges as revenue-producing sales, even tough no

cash changed hands. Employee B had direct communications with those companies

Does: 145334 Ve #:13053:1620 24

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their willingness to purchase capacity from TyCom 9& if TyCom were willing to

73. Employee B stated that with the massive build-out of capacity by

customers (such as Global Crossing, 36Onetworks, and Level 3), there were multipl of

sufficient bandwidth capacity to meet future demand.

74. According to a Senior Director of Global Services, employed by TyCom from

1997 through 2002 at TyCom's Morristown facility ("Employee E"), TyCom's

engineers, as well as other TyCom employees involved in the design aspect ofthe industry, were

O "queasy" that there was not enough market demand to support an additional global

Employee E reported directly to Garvey, was responsible for the acquisition and purchasing of

$650 million ofmaterials annually, oversaw the Global Telecommunications Center, nd assisted

0 in designing and implementing the Global Network.

75. At the time ofthe Offering, according to Employee E, bandwidth capa^ity had

already outstripped demand and pricing was meeting. Rather than onpgmg in tWD or three 0 sales meetings a month with prospective customers, Employee E would only have one: such

meeting every few months.

0 76. According to Employee E, TyCom's network engineers strongly advis d against

the spin-off, cautioning TyCom's marketing and sales division that implementing a new global

network would be a "bad idea" because the telecommunications market was already ecperienci 0 an oversaturation of bandwidth capacity.

77. Likewise, Employee F, a Project Manager at TyCom's Clark facility, stud that he

DocM:145334 Vok1 3033:1620 25

Q 0

ofthe other networks already out there. When Employee F and other engineers, at show

meetings conducted by senior management to discuss the Offering, brought up the

that the TGN would duplicate other networks, they were not given a straight answer.

78. A Shore End Installation 0 Engineer who worked at one of TyCom's its between January 1997 and August 2002 ("Employee G") stated that in the late 1990s a of

companies had produced "more than enough capacity." Employee G was for 0 installing submarine and terrestrial fiber optic cable systems including the TGN.

79. Employee G said that building a cable system takes at least five years ad a "lot of

planning." According to Employee G, as a result of lack of sufficient planning for TGN, C TyCom constructed a $34 million terminal in Hawaii, but never ran cable to it, and an the

company attempted to bring a cable between the United States and China onto land i4 California,

O the cable failed because no one had secured the permits and other official studies nee to clear

the cable. The concerns within TyCom and Tyco about waning market demand and c

bandwidth capacity were not disclosed to the public. Instead, according to Employee H TyCom's marketing and sales division "continued to forecast a huge market" to the p

80. The former Global Forecast Analyst {"Employee H"), who worked

from 1998-2002, confirmed that TyCom's business plan was bogus. Commencing in 2000,

Employee H was responsible for originating, developing and documenting the

forecasting process for TyCom, which also included periodically updating the. plan. R 81. Employee H also interacted directly with the sales staff, who were sou^ces of the

forecasting. Commencing in July 2000, Employee H reported directly to Andrew

boats: 145334 Vw#: 13053:1620 26

C a

82. When Employee H attempted to verify and update, air the Offering, he business 0 plan that was used for the Offering, she was informed by Kowalik that the plan numbers for the

Offering, which had been provided by The Yankee Group, had been fabricated and W no

reasonable basis. C 83. . Kowalik had, prior to the Offering, reported directly to Brennan, the

bank felon (who in turn reported to Garvey). 4 84. A former Director of Technology for TyCom at its Clark, New Jersey

("Employee I"), who had worked with AT&T Submarine prior to its acquisition by

stated that at the time TyCom went public, concern over bandwidth demand was

expressed among TyCom employees. Kozlowski visited his facility and Kozlowski t$ld one of

Employee I's co-workers: "What is everyone afraid of? Ifthe stock falls way down, $'ll just buy

it all back. What are they worried about?"

85. According to Employee D, six months prior to the Offering, beginnings in early

2000, the sales staff, which had previously been employed in efforts to sell undersea 0 systems, was instructed to sell bandwidth in anticipation of TyCom building out its o^vn network.

Notwithstanding their best efforts, including the lowering ofprices on almost a weekly basis, the

0 sales staff was not successfW in making any sales. No bandwidth was sold from the binning of

2000 until the middle of 2001.

86. TyCom and its executives were well-aware that no sales had been math on the

TGN prior to the Offering. Garvey met frequently with his sales staff, including Employee D.

prior to the Offering and was informed that there had been no sales of bandwidth capla^city and v few expressions of interest from customers.

Do*N: 145334 Va#:1 34331620 27

0 0

87. Similarly, Employee H informed plaintiff's counsel that "the and the 0 contracts that were part of the hype" referred to in the Oaring did not exist, and alth

TyCom was setting goals and manufacturing a great deal, "it was all to look good" to

Employee J, a Terminal Engineer responsible for activating cables (and hence availat

bandwidth), who was employed by TyCom from January 2000 to April 2002, stated t at in many

terminals only 1/32 of the capacity was being used. Employee J also stated that man3 Of a TyCom's contracts were being modified at the time ofthe Offering for less capacity. Employee J

stated that TyCom was absorbing the cancellations in the contracts by assuming rshiu ofthe

capacity that was installed and completed.

E. T Fdse Yne Gan Folrwasts

88. Employee H was informed by Kowalik that the Underwriter had

0 instructed him and the executives above him what the sales and revenue projections to be to

induce investors to purchase shares of TyCom.

89. According to Employee H, the Underwriter Defendants instructed to

"come back with the numbers to support those forecasts." Kowalik reported those

inflated demand numbers reflecting growth in excess of TyCom' s internal to The

O Yankee Group, a telecommunications and networking research and consulting firm

in Boston, Massachusetts, and requested that The Yankee Group prepare a market

analysis based on the fabricated figures. U- 90. On January 12, 2000, Robert M. Luczak, TyCom's Strategic

Specialist, Global Marketing & Business Development, sent a Request for Quotation to a The Yankee Group for the preparation of "a demand analysis for various traffic for

Dc : 145334 Va #-.1 3033;1620 28 c E

the period from 2000 through 2009. Luczak informed The Yankee Group in the that a °`[TyCom] had already completed a basic Global Supply and Demand-side analysis" id that it

"would like (The Yankee Group] to use this analysis as a starting point for the Y Group's

analysis." The RFQ emphasized that "the Yankee Group's final presentation is ad to be a

validation ofprevious [TyCom] efforts ... intended to serve [in anticipated SEC ] as an

objective third-party view of global demand for network capacity." r•^ 91. Luczak further stated in the RFQ that after the Yankee Group d its "own

demand analysis" it would be required to "evaluate the [TyCom] Demand model and ooject s

and render an assessment as to its approach and consolidations" and "improve its model if

warranted ...."

92. The RFQ was "carbon copied" to members of TyCom senior •nt-

Travis Kassay, Stan Kramer, and Andrew Kowalik.

93. Employee H was told by Andrew Kowalik that The Yankee Group's

predicted much larger demand growth than TyCom's internal analyses because The n Group had relied on TyCom's falsified projections.

94. On February 25, 2000, TyCom completed a "Find View" of the

7 View. That Market View projected that demand for the tic and rings for

the years 2001 through 2005, measured in units of equivalent synchronous transport

level one ("STM-1 s") -- circuits that carry 155.52 million bits per second ("mbp/s") 0 capacity -- would increase on an annual compounded rate of 66.25% (calculated by average

ofthe eight annual growth rates indicated below), as follows:

NO: 145334 Vc#:13053:1620 29

0 (1.) 2001 2862 2903 29" 20 Ave.

D .id of 9TM-1 6,170 9,872 14,500 22,212 32,207

% Growth ofDarsrt 69% S8% 50% 45% 51.25%

(2.) Tra Podal RAW ]M1 . ]M2 3003 =4 216 Ave.

Dewed of STM-1 1,432 2,864 5,012 8,771 15,349

% Gh"Pa ofDraw 108% 75% 75% 75% 81.25%

95. In June 2000, TyCom compiled a spreadsheet comparing its own forec of

demand, as set forth in the February 25, 2000 Market View, to those of The Yankee C

Annexed as Exhibit A. The Yankee Group' s demand forecasts of 71 % average annw growth in

the transatlantic region and 85.75% average annual growth in the pacific region- whi according

to Employee H were based on falsified TyCom data - were significantly higher than the actual

demand forecasts prepared by TyCom, particularly the forecasts for trans-atlantic for the

years 2001 through 2005:

2"1 2902 2003 2094 2006 Ave. Tru s.Ataulk 7yCom 6,170 9,872 14,809 22,212 32,207 %Gmwth 6096 30% 50% 4596 31.23%

Yankae[roup 9,412 15,379 30,564 58,415 76.502 %Growth 63% 99% 91% 31% 71.00% 1FAt TyCom 1,432 2,864 5,012 8,771 15,349 % Growth 100% 75% 75% 75% 81.25%

Yukee Group 11,007 26,168 56,487 92,883 115,761

%Growth 138% 116% 64% 25% 85.75%

30 0

96. According to Employee B, The Yankee Group's projections (and Ty4om's 0 internal projections) were inflated by inclusion of non-cash swaps of bandwidth betty en carriers,

and did not reflect end-user demand. The Yankee Group's projections were based o^ TyCom's i inflated projections and communications with companies, such as Global Crossing, qwest, and [] i Level 3, whose auditors were Arthur Anderson and investment advisor was Jack Gru^man, and

who had (according to Employee B) principally reported revenues based on swaps in violation of

GAAP.

F. The a PIb& QftdU

97. On January 17, 2000, just five days after sending the RFQ to The Yai4ee Group O and the same day that Tyco was scheduled to receive The Yankee Group's response, co issued

a press release announcing that in response to rapidly increasing market demand for u

0 bandwidth, it planned to develop TyCom into a publicly traded company for the purp of

designing, building, installing, operating, and maintaining its own global undersea fit optic

communications network, to be known as the TyCom Global Network, that would be e "largest O and most advanced global undersea telecommunications fiber optic network." The pi 3 release

stated:

O "Undersea cable has been a contributor of strong earnings and cash flow to Ty;o for nearly 30 years," said L. Dennis Kozlowski, Chairman and Chief Executive Officer of Tyco. "In recent years, due to both growing demand and Tyco's mar cet l ip, the undersea fiber optics mss has significantly increased its backlog of underseacontracts; developed and implemented several breaktbmu h Q technologies in undersea telecommunications, primarily related to increasing undersea cable capacity; pared witb key customers through equity participation; and crested innovative long-term maintenance con is suoh as the previously announced SEAHORSE(TM) global operation and maintenance prxwn. The TyCom Global Network will enable Tyco to realize additional value p for our shareholders by putting our expertise to work notjust as a designer,

0 0

builder and maintainer of systems, but also as an owner and seller of undersea cable bandwidth to the telecommunications carriers of the world."

Waumda- The integration ofthe Internet into the da lives ofthe world's population, combined with the burgeoning needs of glot commerce and industry for data and other broadband applications, continue drive growth and demand. As broadband terrestrial fiber optic networks are Q completed, they require the availability of undersea systems to connect with rest ofthe world. Tyco's current position as the premier independent, fully integrated supplier and maintainer ofthe newest technologies for undersea # optic networks provides it with a unique set of abilities to meet the current a ongoing needs of a true global telecommunications network.

0 f

Tyco intends to offer up to 20% percent of its undersea fiber optic cable busineos for sale in an initial public offering. Tyco expects that a regiatra ion statement . be filed with the Securities and Exchange Commission in the first calendar qua ter 4 of 2000 and to complete the offering by midyear, subject to market conditions [Emphasis added.]

98. Tyco common stock rose $5.125 on January 18, 2000 in response to invoor

99. On July 26, 2000, TyCom filed an amended Registration Statement and final

Prospectus with the SEC for the initial offering of61,130,435 shares of TyCom common stock at O $32 per share (excluding the over-allotment option).

100. Ofthe $1,854,115,000 in estimated net proceeds from the Offering (exciudin6 the p over-alloftmt option), the Prospectus represented that $1,654,115,224 would be used t`toward the

deployment ofthe first phase ofthe TyCom Global Network and $200,000,000" would be paid to

a wholly-owned subsidiary of Tyco. 0

0 r- 6-Li

101. Goldman Sachs, Merrill Lynch, and Salomon Smith Barney were the lead

102. As & result ofthe Offering, Tyco went from owning 100% of TyCom's on

stock to being the 86% owner of TyCom common stock.

103. The Prospectus (at 3) stated with regard to TyCom that:

We have designed, engineered, manufactured and installed over 300,000 © kilometers of undersea cable. With our fleet of eleven ships, we have played a principal role in the deployment and maintenance ofmost ofthe world's major undersea cable networks. Over the last nine yens, our laboratory division, Ty( Laboratories ... has achieved milestones in the laboratory environment by increasing the amount ofdata that can be transmitted on undersea. fiber optic networks. 4 104. The Prospectus (at 3) represented that TyCom planned to go into b ss in

competition with its then existing customers, for whom it had been manufacturing ban width, and

® "to use our expertise to design, manufacture, install, own, operate, maintain, and sell

capacity on what we believe will be the most extensive and technologically advanced

umkrsea fiber optic network - the TyCom Global. Network."

105. The Prospectus added (at 3) that TyCom would, in competition with its

position itself "as an independent provider of bandwidth solutions to a providers, Internet and application service providers, and otters requiring significant

capacity," while still intending "to reserve a portion of our cable system supply capacit^ for the

needs of our customers." O 106. With regard to the timing of development of the TyCom Global Network, the

Prospectus represented (at 3) that:

O C

The first phase of our network will be designed to offer bandwidth capicit upgradeable to a minimum of 2.56 terabits per second, span approximately 70 undersea kilometers and connect 27 ofthe world's major telecommunication centers, including New York, London, Paris, Tokyo and Hong Kong. We anticipate that the transatlantic portion ofthe first phase will be operational in the second halfof 2001 and the Winder, consisting ofthe transpacific and E portions, by the end of 2002. We plan to fund the first phase of our network '#h cash from operations, all or a portion ofthe proceeds from this offering and drawn under our credit agreement with Tyco. We expect that the entire Global Network will be completed in approximately ten years and that it will s. pu approximately 250,000 undersea kilometers, linking terrestrial networks on all six inhabited continents.

107. The Prospectus (at 23) estimated that' the total cost to implement the Brat phase of

TyCom Global Network, as currently contemplated, will be approximately $5.7 billioi."

0 108. According to the Prospectus (at 3), the principal elements of TyCom's

strategy were to:

• Deploy the TyCom Global Network to Address &Mffi fing De^^rar, We are launching the TyCom Global Network to address the ' for undersea fiber optic bandwidth driven by the growth ofthe Internet and band* dth- intensive applications. [Emphasis added.]

• Transform into a Provider of Undersea Bandwidth Services. We WOU4 to O build on our record of technological innovation, our experience in undersea sy#ems supply and our customer relationships to focus on providing a broad spectrum of bandwidth services. undc^=

• Deliver Customer-Driven Network Solstions. We expect to offer our 4 customers a wide range of undersea bandwidth capacity options and flexible ' to terrestrial networks and develop customer-driven network and bandwidth ent solutions, including AMW private networks and selected Internet enabling acts and services.

B 109. The Prospectus finther indicated that the TGN was likely to be successfil because,

based on research conducted by The Yankee Group, global demand for undersea bandv idth

capacity was expected to rapidly i +ease, stating (at 36) that: 0 34

0 0

Q app mate1v123%o from 2000 t roual^ 2O0 . As a result of the rapid develop of terrestrial networks in the United States and Europe over the last few years, demand for undersea bandwidth capacity to link to those and other networks is increasing. This need for inte ronnectivity requires the deployment of large bandwidth transoceanic systems. AW&MjW to The YA*M

122% km 2 lbe2ah 2005. Demand for large bandwidth transoceanic sys is developing, in part as a result ofthe use ofwireless Internet and the ongoing deployment ofterrestrial networks in the region. This Wig" AmmML&

And hmxbnft gown ammdm especially those that have the technology, capital and infrastructure required for fast deployment and reliable maintenance of undersea fiber optic cable system. (Emphasis added.] a 110. The Prospectus contained (at 66) a summary compensation table for Kozlowski, Garvey, and Swartz, and TyCom's other executive officers. Included amo gthose

disclosures (at 71) was a summary of TyCom's Key Employee Corporate Loan Progra (µKEV) a that, according to the Prospectus, was "to encourage ownership of Tyco common shah by key

employees" by providing loans to be "primarily used for the payment of taxes due as a ;cult of

the vesting of restricted stock." 0 111. According to the Prospectus (at 71), the summary compensation table

the annual and long-term compensation for services in all capacities to Tyco and its

0 for the Chief Executive Officer of TyCom and the other four most highly executive

officers of TyCom during fiscal 1999."

112. The Prospectus stated (at 71), under the heading "Employee Corporate I,oan C Progiam," that:

35 a 9

Tyco US established the 1983 Key EmployeeCorporate Loan Program, as amended, Loans are Rdmadly vakfbr the == ottaxm 6i m 1% result of the va unrestricted stock.

The Tyco compensation committee administers this loan program. The Tyco compensation committee authorizes loans, winch may not exceed the amount allowable under any regulation of the United States Treasury or other applical statute or regulation....

[a]t September 30,1999, the amount of loans outstanding under this loan program O totaled $18,569,137, of which $0 was loaned to Mr. Kozlowski, $304,363 was loaned to Mr. Garvey and $0 was loaned to Mr. Swartz. The la Best amount o indebtedness outstanding at any time since October 1,1998 by Mr. Kozlowski $52,688,249, by Mr. Garvey was $ 1,153,645 and by Mr. Swartz was $17,435,319. [Emphasis added.]

0 113. The Prospectus also stated (at 65) that after the closing ofthe Offering, khe TyCom

Board (which then consisted only of Kozlowski, Swartz, and Garvey), would be expanjded to add

three "fit" non-management directors: Brenda C. Barnes, Frank P. Doyle anA Warren V.

Musser.

0 1.

114. The Prospectus was materially false and misleading because it represented that

TyCom was making the Offering to capitalize on the increasing demand for 0 115. In fact, the telecommunications market was oversaturated with bandwidth capacity

and TyCom knew that capacity was continuing to increase at a greater rate than

Q 116. By way of example, the Securities and Exchange Commission alleged i a

Complaint against Qwest Communications International Inc. dated October 21, 2004 ir^ Securities

(at paras. 28-^9) that O

O ©

"[i]n 1999 and 2000 ... other major fiber-optic network providers had flooded the mau^ et with

capacity by forming their own networks. Further, as a result of. rapid technological ad nwees, the

transmission capacity of new and existing fiber-optic networks substantially increased For

example, by 1999 each strand of fiber that Qwest had built could carry 256 times more capacity

than when it was originally installed. As the technologically advanced and capacity inciumd, the

price at which Qwest could sell its excess fiber-optic capacity declined dramatically."

117. TyCom, because of its position as a dominant manufacturer and service of

underwater fiber-optic cable, had actual knowledge that `major fiber-optic providers h d flooded

the market with capacity." Q 1 18. The lack of demand for fiber-optic capacity at the time of the Offering * further

established by the information provided by the following former TyCom employees:

most bandwidth was still dark; that was nothing on paper or in eontrac s that

indicated that there was a great need for more undersea cable services; "he whole

IPO was a fraud");

b. Employee D (although the sales staff "tried its best" to sell bandwidth oo the

O Proposed TGN starting six months prior to the Offering, not a single sal of TON

bandwidth had been made as of the time ofthe Offering);

c. Employee E (bandwidth capacity had already outstripped demand and p icing was

Plug);

d. Employee F (the TGN was just a duplicate of the other networks alreadd out there);

37 C

e. Employee U (in the late 1990s a number ofcompanies had produced " than

D enough capacity),

f. Employee H (The plan numbers for the Offering had been fabricated.

customers and the contracts that were part of the hype" in the Offering not

exist. The Underwriter Defendants had instructed Kowalik what the sa^ and

revenue projections had to be for the Offering to be saleable); and

B. Employee J (onlyy 1/32 ofthe capacity was being used).

119. Although the Prospectus disclosed (at 14) that "demand for bandwidth acity that

0 we expect may not occur," and that "the supply of bandwidth capacity may expand m rapidly

than we expect" - the Prospectus failed to disclose that demand for the Global N was

already non-existent and that there was already an over-supply of bandwidth.

120. Furthermore, the false representations about market demand in the Pros xtus were

made even more misleading by TyCom's failure to disclose other relevant information In the

some June 2000 spreadsheet in which TyCom compared its own forecasts to terse of e Yankee 0 Group, TyCom also compared its own and The Yankee Group's fit= projections of pricing

ofbandwidth capacity. The decline in pricing through 2005, is reflected as follows:

211 2M 2003 20 3M

Trau.AWNk TyCom $1.50 $ 1.02 $0.69 $0.52 $0.42 Yankee Owup $1.90 $1.27 $0.85 $0.57 $0.38

Trmzo^ftft TyCons $2.00 $1.40 $1.05 $0.79 Yankee Group $1.33 $0.93 $0.65 $0.46

0 0

121. As this comparison demonstrates, both TyCom and The Yankee Gro had

determined that bandwidth pricing would decrease significantly through 2005 and ' ue its

decline through 2009). Nonetheless, the Prospectus failed to reveal in its discussion ofmarket

demand that prices for bandwidth capacity were expected to plummet and that revenues were

projected to increase at a dramatically reduced rate than otherwise indicated by the Prospectu

122. Although the Prospectus did disclose (at 14) that TyCom "expected ... ]aim for

in the some manner as it disclosed (albeit falsely) the increase in demand that was anticipated.

2. The Prospectus.aprera^^d The Yss a Greap's Pro* a of hbrkot Deu and Feed to Discbk

123. The Prospectus' representations with regard to The Yankee Group werr materially 0 false and misleading inasmuch as the Prospectus failed to disclose that (i) The Yankee Group's

forecasts of 123% transatlantic and 129% transpacific bandwidth growth had been modeled on

Q TyCom internal forecasts that were inflated at the direction of the Underwriter Defimd^nts; (ii)

TyCom's actual internal projections of market demand were materially lower (66.25% growth)

than The Yankee Group's projections, and (iii) both TyCom and The Yankee Group hod projected a that pricing would substantially decline from an oversupply of bandwidth.

124. TyCom's internal comparison of its projections to The Yankee Group

(Exhibit A) further demonstrates that The Yankee Group was Mg projecting 123% annhal growth

in the atlantic region and 129% annual growth in the pacific region, as represattted;in the

Prospectus, but rather much lower growth rates of 71 % and 85.75%, respectively. C

0 v

projections) were further materially false and misleading because they were based on

communications between The Yankee Group-and companies such as Global Crossing, Qwest,

Level 3, and 360networks, which were recognizing revenue and projecting demand foi bandwidth

based on anticipated swaps of bandwidth capacity - where two companies with excess capacity on

their networks merely swapped each other's capacity in non-cash generating 4 126. Moreover, The Yankee Group's projections were not objective. Rather The

Yankee Group had been directed by TyCom to make its projections based on TyCom' J own v internal projections and was told that its projections will be included in documents to t$e used for

the sale of TyCom securities.

3. The Pra.peetw Min epr"eated the Iod vide Dthndasts' 4 E: *e Cs #ls+n and Famed to Disclose That

127. SFAS No. 57 requires that financial statements identify material

transactions; (c) the dollar amounts oftransactions for each period for which an incom^ statement

is presented; and (d) the amounts due from or to the related parties as ofthe date of each balance 0 sheet.

128. Further, Item 402(2) of Regulation S-K "requires clear, concise and undrstanda

disclosure of all plan and non-plan compensation awarded to, earned by, or paid to the flamed

executive officers ... and directors ... by any person for all services rendered in all capa ities...."

Similarly, Item 404(a) and (c) requires disclosure of "any transactions, or series of similar C

40 O

transactions, [or indebtedness, between management and the registrant], since the beg4nning 0 ofthe registrant's last fiscal year ... in which the amount exceeds $60,000."

129. Tyco, Kozlowski and Swartz engaged in numerous material related parfy and self-

a dealing transactions that were not disclosed in the Prospectus in violation of SFAS No^ 57, and

Items 402(2) and 404 of Regulation S-K.

130. The Prospectus was materially false and misleading because it failed to

that, in addition to the Key Employee Corporate Loan Program, defendants Kozlowsk and Swartz

had, without Board approval, instituted a corporate "relocation loan" program and as OSeptember

O 30, 1999 had outstanding loan balances of $35,307,668 (September 17, 2002 Tyco Form 8-K at 9)

and $7,862,532 (September 17, 2002 Tyco Form 8-K at 12), respectively.

131. In violation ofthe terms of Tyco's relocation loan program, Kozlowski 0 approximately $29.7 million from Tyco to purchase land and construct a home in Boca Raton,

Florida from 1997 to 2000, and improperly "borrowed" app oximately $7 million to p^irahase a

O cooperative went in New York City in 2000.

132. The Prospectus also failed to disclose that the true purpose ofthe Corpofate Loan

Program was to confer substantial personal benefits on the Individual Defendants rather than to C encourage stock ownership by providing for the payment oftaxes as stated in the

Tyco's September 17, 2002 Form 8-K (the "September 8K") subsequently revealed (a4 20) that

G defendant Kozlowski used in excess of $55 million in Tyco funds acquired through the Corporate

Loan Program principally to acquire high-end real estate and make extravagant

41 c O

133. The September 8K further established that Kozlowski and Swartz had .s O represented in the Prospectus their indebtedness under the Corporate Loan Program of

September 30, 1999 at $0 by causing unauthorized accounting entries reducing their

0 by $25 million (Kozlowski) and $12.5 million (Swartz). Those amounts were

reinstated on Tyco's books and records as Kozlowski' s and Swartz's obligations unde# the

0 Corporate Loan Program as of September 30, 1999.

134. These material related party transactions (to which Tyco has admitted) not

disclosed in the Prospectus, rendering the Prospectus materially false and misleading.

4. The Prospectus Failed to Dbebu that the Individual Ddb Were Financially Motivated to Use the Proceeds

135. The Prospectus failed to disclose that the Individual Defendants were 0 to make the Offering so that Tyco would realize a $200 million dividend to be used in hart to pay

defendants Kozlowski and Swartz and other executive officers bonuses that, in turn, would be

O applied by them to the repayment of their outstanding key employee and relocation

136. In September 2000, shortly after the closing ofthe Offering, defendant

caused Tyco to pay "special" bonuses from the proceeds ofthe TyCom Offering. Thee bonuses 0 approximated $96 million, of which defendant Kozlowski and Swartz received approx mutely $33

million and $17 million, respectively.

O 137. In connection with the above arrangement, a Tyco Vice President of Finance

prepared a memorandum signed by defendant Swartz that explained:

The sale of 14% of TyCom berated a one-time gain of approximately $1.76 billion on the books of Tyco. We have decided to award special bonuses to various

42 c G

Tyco employees for their efforts over the past few years in enhancing the value of TyCom and thereby contributing to this gain. Selected employees will receive the bonus in the form of cash, forgiveness of relocation loans, and/or Tyco common shares under Tyco's restricted stock program.

138. Kozlowski and Swartz, aware that the use ofproceeds from the Offerin to pay p these bonuses should have been disclosed in the Offering, sought to bury the bonuses n Tyco's

books and records. The September 8K admitted that "this extraordinary $100 million Charge was

allocated to several different accounts and appears in the general ledger and financial statements." O 139. The WAU Street Journal, on September 30, 2002, reported on Tyco's September 17,

2002 Form 8-K, as follows:

[T]he TyCom bonus was booked in three different accounts totaling $97.4 mil - a slightly larger figure than the bonus payments, which Tyco didn't explain. About $44.6 million of the total was booked as part ofthe TyCom offering expense....

The other $52.8 million, however, doesn't appear to have been counted as an expense at all, according to three accounting experts who reviewed Tyco's film Instead, Turco seems to have hidden the sum in two different reserve accounts tl had been previously established on the balance sheet for unrelated purposes. T majority of the money, $41 million, was booked against "Accrued Federal Inca Tax," the filing says, in effect reducing sums that Tyco had put aside to pay its federal corporate taxes.

"It looks like a blatant misstatement of both the income statement and the bale sheet," said Charles Mulford, an accounting professor at Georgia Institute of Technology in Atlanta, who reviewed the Tyco report but isn't involved in the case. Based on the filing, Mr. Mulford said the maneuver appears to have improperly inflated Tyco's pretax income by $52.8 million in the period, the fi quarter of fiscal 2000. For that quarter, Tyco reported net income of $1 .1 billi, before the TyCom gain."

0 140. Tyco, in its Complaint filed against Kozlowski in the United States Distjrict Court

for the South District ofNew York, dated September 12, 2002 (Civ. No. 02-ev-731 ' } (at IM 44-

43 C

46), confirms that the Offering was motivated by Kozlowski to generate a pool ofmorey to

By the summer of 2000, Kozlowski's indebtedness had again risen to over $37^ million, in large part because ofhis $25 million Florida Relocation interest free loans on the acquisition of his compound in [Florida.] o Kozlowski then contrived, promoted and fraudulently executed a plan to grant himself relief from his excessive level of relocation indebtedness by granting himself benefits of a type that, if legitimate, would not need to be disclosed in Company's proxy statement and could therefore be concealed from the Board.

Thus, in early September 2000, Kozlowski falsely informed Tyco's Senior VP of Human Resources that, in addition to cash and share bonuses for the success completion of a public offering ("IPO") of some ofthe shares of a Company subsidiary (TyCom) the Board had decided to forgive all ofthe relocation i for all of the more than 40 employees who had relocated to Florida in 1998. He exacerbated his fraud even further by falsely representing that the Board to "gross-up" the benefits, making such each employee whole on an after-tax bass for the forgiveness of a loan. In effect, he falsely represented that the Company d both forgive the loans and pay the employee's income taxes associated therewi . a 141. The Individual Defendants' true motivation for the Offering -to

offering proceeds to pay bonuses - if disclosed, what have cast material doubt among investors on

the fabricated motivation for the Offering - to meet the purportedly "increasing demand" for

bandwidth.

142. Employee B stated that only after learning about Kozlowski and Swartzf s

unauthorized loans from Tyco and the payment of unauthorized bonuses from the pros s ofthe

TyCom public offering, and the additional bonuses paid on completion of the TGN, di4 he

recognize that "the whole IPO was a fi^aud." O

44 0

5. The Prospectus Failed to Disclose That The Reported Success of Tyco Was the Raca& of Systematic Accomwdog Manipulations,

143. The Prospectus (at 72) disclosed that Tyco would retain control of after the

a Offering and continue to provide TyCom with management and administrative including,

most significantly, financial, securities filings, professional services (including

services), and investor relations/iavestment advisory services. O 144. In fact, the success ofthe Offering was based in substantial part on the

reported history of profitability and increasing stock prices of Tyco, and Tyco's continue a to successfully manage TyCom's operations. From 1997, when Kozlowski became CEO and

Chairman of Tyco, to July 2000, Tyco's stock price had soared from $15 to $50 per

145. By way of example, the IO Renorter stated in an news article dated 24, 2000,

two days prior to the Offering, that:

Then there is the Kozlowski factor. The TyCom executive chairman - first Dennis - has been with Tyco since 1975, serving as its chiefexecutive since J 1997, and leading the company to one of its most prosperous periods. "Kozlo O is a major creator of wealth," said Comack. "That' s a deal I wouldn't bet ."

146. Given the central role of Tyco in the Ofering, defendants had s to

disclose all material facts relevant to Tyco's reported operating success. The 0 however, failed to disclose that Tyco's purported growth had been orchestrated systematic

financial fraud. As Tyco admitted in its Form $-K filed on December 30, 2002 (the "D^eoember

8K") (at 5), during at least the five years preceding Kozlowski's resignation in June 201)2, Tyco

pursued a "pattern of aggressive accounting" that was "intended" to "increase current elamings

45 G

above what they would have been if a more conservative accounting approach had p followed."

147. The December 8K specifically stated (at 17) that with regard to twelve

acquisitions by Tyco that used purchase method accounting, including the acquisition bf SSI in a 1997, there was a "notable lack of documentation supporting the establishment and utilization of

reserves and a pattern of aggressive purchase accounting." Indeed, the December 8K

and procedures to prevent the misconduct of senior executives that occurred;

procedures for proper corporate authorizations; inadequate approval procedures and p documentation; a lack of oversight by senior management at the corporate level; a pattern of using

aggressive accounting that, even when not erroneous, was undertaken with the purpos4 and effect

of increased reported results above what they would have been if more conservative

were used; pressure on, and inducements to, segment and unit managers to increase

earnings, including by decisions as to what accounting treatment to employ, and a lack of a stated

standards ofethics, integrity, accounting, and corporate governance."

148. Moreover, the December 8K acknowledged (at 15) that:

[There were instances where prior management appeared to influence the management of an acquisition target into adopting accounting treatments that "over-accrued" expenses prior to an acquisition's consummation or otherwise O exceeded what was permitted by GAAP.

149. With regard to SSI, as alleged above, according to Employee C, the Project

Manager at TyCom's Morristown facility, during the period prior to the July 1, 1997 acquisition F

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from AT&T, management of SSI were encouraged to defer the recognition of revenue from

p contracts so that Tyco could report inflated operating results in subsequent periods.

December 8K further determined (at 23) that SSI had established prior to the Tyco acr uisition a

$45.8 million reserve towards the cost of purchasing fiber optic cable from a third part' that likely a violated GAAP, and would have inflated Tyco's operating results after the

150. The December 8K further indicated (at 7) that Tyco intentionally sougl4t to

Tyco's aggressive accounting in the past was not neutral as to the timing ofth recognition ofrevenues and expenses. The Company, for example, devoted considerable less attention to identifying appropriate accounting adjustments I 0 would reduce reported earnings in the period immediately after an acquisition it devoted to identifying appropriate accounting adjustments that would incree reported ea nings after an acquisition.

151. Tyco also admitted (in the December 8K at 4) that it was unable to ma* judgments 0 about the appropriateness of accounting treatments because of "the Company's past fa4lure to

document many decisions contemporaneously," and because documentation supportin its a transactions is "not always available" and is "often dispersed."

152. Tyco's "pattern" of "aggressive" accounting and its employment of

"financial engineering" practices "undertaken with the purpose and effect of increasing reported

results" caused Tyco to issue financial statements during the Class Period that were ther usefiil,

complete, neutral, conservative, nor unbiased. So December 8K at 4, 6, and 12.

153. Accordingly, Tyco has admitted that it violated fundamental precepts of generally

accepted accounting principles ("C3AAl''), and that its "aggressive" accouu g pt c^es rendered

its financial statements during the Class Period materially false and misleading.

O 0

154. In 1999 and 2000, the SEC conducted a Matter Under Inquiry (MUJ) p Tyco's acquisition accounting. At the beginning of the inquiry, the SEC requested the Tyco

produce various categories of documents.

155. In July 2000, the SEC closed its informal inquiry. However, Tyco adm)tted in its a December 8K (at 29) that "[a] large quantity of documents collected by Tyco and its counsel in

connection with the SEC 's document request had not been produced to the SEC at the time the p SEC closed its inquiry."

156. An article in the December 27, 2002 The Wail Street Journal also show that

Tyco's outside counsel knew in early 2000 that Tyco had serious accounting problems [and that C corporate funds were being misused by Kozlowski, Swartz, and Tyco' s other senior

157. The Wall Street Journal quoted two of the emails:

March 23, 2000 e-mail from Lewis Liman [outside counsel] to Mark Belnick, former Tyco General Counsel: `fbere are payments to a woman whom the folks in finance describe to be Dennis's girlfriend. I do not know Dennis's situation, but this is an embarrassing fact." [This refers to payments from the KEL account 1997 to Karen Mayo, now Karen Kozlowski.]

May 25, 2000 e-mail from William McLucas [outside counsel] to Belnick: "M have found issues that will likely interest the SEC ... creativeness is employed hitting the forecasts...." "There is also a bad letter from the Sigma people just before the acquisition confirming that they were asked to hold product shipme just before the closing." The same e-mail also said that the company's financi reports suggest "something funny which is likely apparent if any decent accou looks at this."

158. This Court, in its opinion in a 2004 U.S. Dist. LEXIS 20733 (D.N.H. Oct. 14, 2004), sustained similar allegations of

fraud by the class re sentative lead plaintiffs in that action against Tyco, Kozlowski, p Swartz, among others.

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159. Tyco's fraudulent accounting practices were used to generate cash to find Tyco's

create incentives to continue with the accounting fraud.

160. The accounting manipulations and lack ofcorporate governance and 0 in existence at Tyco as ofthe time ofthe Offering were the same issues that would co4ie to plague

TyCom during its existence as a public company - such as the misrepresentation of and

(discussed below), which had no economic justification. The accounting and accoan*ity issues

revealed with regard to Tyco in the September and December $Ks, if publicly discloseo at the time

0 of the Offering, would have akoW prospective TyCom investors to the true risks of

TyCom common stock.

6. The Prospectus Min "masted the Identity of the Mein of Ty Es tive .aunt and Failed to Disclose man's Active

161. The Prospectus identified (at 62) the "directors, director nominees, and exw

0 officers of TyCom Ltd., and other key management of some principal business fimcdons of

TyCom (US) Inc... as of July 6, 2000."

162. The Prospectus however failed to disclose James F. Brennan's central le in the

planning of the Offering and his criminal record of bank fimW and suspicion of pqjury.

163. Brennan's participation in the Offering was a material fast that, if disclc ^sed, would

0 have affected the total mix of information in the Prospectus and would have had

significance to a reasonable investor's willingness to invest in TyCom common stock On the

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o 164. The Prospectus was further materially false and misleading because it wiled to

disclose that telecommunications stocks such as TyCom were being buoyed by the

Defendants' analyst research recommendations, which were motivated to establish or 4 investment banking relationships. Rather, the only "conflict" disclosed in the Prospe. us (at $7)

was that the Underwriter Defendants had 'performed certain investment banking and

® services for Tyco and TyCom."

165. Inasmuch as the Prospects sought to disclose certain underwriter relatia nships, it

had a duty to disclose all such relationships. D 166. In fact, Kozlowski affirmatively and falsely stated in connection with

Offering, according to a duly 27, 2000 Bjq=b^= News report that: "there's a wall 6e^ veers the

analysts who follow Tyco and the people on the investment-banking side, who are ver capable of

handling this sale. I don't see that there's a conflict at ail."

a. Goldman Sachs

Division of Securities ofthe Department of Commerce ofthe State of Utah, Goldman

telecommunications' analysts had turned pessimistic on the prospects for the

industry prior to the July 26, 2000 Offering but continued to publicly rate those stocks `buys" to

secure profitable underwriting retentions.

168. Among other things, the Goldman analyst assigned to provide research 4 n TyCom

- Frank J. Governali - had a subjective belief that Global Crossing, TyCom's primary

and competitor, was over-rated by Goldman. D

0 v

169. Goldman had initiated coverage of Global Crossing on October 14, 1959 by

analysts Robert M. Pomeroy and Frank J. Governali with a new "Recommend List" J$50.00

per share price target - when Global Crossing was trading at $34. 813 per share..

a 170. On March 26, 2000, Pomeroy wrote Governali in an email titled think

they are bullshitting us;" "I am now convinced, more than ever, that their guidance s not make

any sense.... They are hiding behind the complexity of their accounting. I am there is 0 now an X factor that is sucking cash flow out of GBLX."

171. Governali responded by stating: "'their guidance for 2000 must be

0 172. Goldman, however, failed to downgrade Global Crossing because (i) it would

shortly, on March 31, 2000, be named co-lead underwriter with Salomon and Merrill rnch,ona

$3.25 billion Global Crossing common and preferred stock offering, and (ii) was in midst of

the registration process for TyCom's Offering. A Goldman downgrade of Global Dina would

have an adverse impact on the Global Crossing and TyCom Offerings.

173. The Utah Consent Order further Q stated (para. 56) that Goldman's research analysts had misrepresented the business prospects of companies in the global sector,

consisting of TyCom and its major competitors, such as Global Crossing, as well as

0 Local Exchange Carries ("CLECS"), in the Summer of 2000 - at the time ofthe

In August 2000, dames Golub, the co-head of global telecommunications se O wrote Frank Gove nali, the other co-head, about the "anomalous situation %^ our sector has been tookkS for 3-4 moms and we globally still have a ma of stocks as Rfecommended] L[ist] as that is all the selesman and clients can I 4 " Golub suggested that Governali at least consider the approach he had takes: Europe, we have found that honour is preserved if we have a stock as a M(a 0

0 0

O[utperformer] and the companies can't complain because [it's] better than a M[arket] P[erformer]." Governali agreed, saying he planned "to re-rate most Ar p CLECs, which is where the problem is most egregious. The ratings were resi from [a departed analyst], and I never changed them, not wanting to disrupt 9 too much. But, it's ridiculous. I've already met with the bankers, and plan to move most ofthe companies'down to M{ar1 ] O[utperformeiL. from R[ecommended] L[ist] before [another analyst] takes over completely in September.... I don't think I would end up leaving only 7.5% as R[ecomenda L[ist], but the present 68% is ridiculous."

174. CLECs provided local communications services in competition with

® Local Exchange Carriers such as Bell Atlantic, Bell South, and GTE and were

customers for bandwidth at the time of the Offering. A Goldman downgrade of (Bobs Crossing,

other telecommunications companies, or the CLECs prior to the Offering to reflect the Goldman's

adverse impact on Goldman's ability to secure the TyCom underwriting or to take Ty( om public

175. The Utah Consent Order concluded (para. 92) that Goldman's analyst r search was

biased and subject to pressure by investment bankers and mainta buy ratings on skocks such as

Global Crossing to secure underwriting commitments on other companies, such as T om, in the

some sector:

Goldman Sachs research was subject to pressures or influences by investment 0 bankers. At times, bankers were allowed to review and comment on research reports and pressured analysts about the timing to initiate coverage on specific issuers. At least one analyst felt it was soles difficult to voice strong opinions. ina off= ofthe fign MR 0

. his added.]

0 F-7 u

b. Salomon Soft Barney

Q 176. Salomon's stunning success was a complex scheme that the New Yorl Attorney

General described as "commercial bribery." To obtain the coveted investment services

and fees, Salomon enticed top executives oftelecommunications companies with a kage of 0 Wall Street's hottest currencies: (1) a guarantee of favorable analyst reports and Minl s to bolster

the value ofthe potential client's stocks; and (2) for the decision-makers at the poten4i clients,

lucrative shares in "hot" initial public offerings. This illicit, multi-faceted pw

arrangement was never disclosed to TyCom investors, who relied on the supposed inte^xity of

Salomon's underwriting process and the independence of Salomon's research.

177. In April 2003, the New York Attorney General's Office released fmdinis and

conclusions arising f om its investigation of Salomon's investment banking and v activities.

Assurance of Discontinuance Pursuant to Executive Law of 6B(15), dated April 21,

("Citigroup Assurance of Discontinuance"). The Attorney General found that Salomo had long

assured investors that their research anal ^ were -'providing indepen^Jent objective a^d unbiased

information, reports, rating and recommendations upon which investors could rely in rachin$

investment decisions." Citigroup Assurance of Discontinuance ¶ 14. However, documents

referred to in the Citigroup Assurance of Discontinuance, and elsewhere, demonstrate that

Salomon had a very different idea ofthe role of the research analyst in affecting decisi n making.

0 178. According to the Attorney General 's findings m' the Citigroup Assuranco of

Discontinuance, Salomon's business practices "intertwined research with investment b0nking to

exert inappropriate influence over research analysts." Moreover, the Attorney General (found that

F Salomon "failed to manage the resulting conflicts of interest in an adequate or appropiate

0 manner." This was because the incentives for integrating the two services and, even more so,

fostering the conflicts of interest were clear: as the Attorney General found, ` researc was a cost

center" for Salomon, whereas investment banking buses generated substantial profits. 0 179. It was well known at Salomon that the purportedly independent researci process

was a farce. In December 2000, John Hoffman (Salomon's chief of equity research) t+ld Michael

0 Carpenter (Salomon's Chairman and CEO) that there was "legitimate concern" about

objectivity of Salomon's analysts. In a presentation addressing Salomon's research raiings at a

Salomon equities management meeting in early 2001, Hoffman showed that, of the 11 f79 public O companies that Salomon rates, there were gQ "sell" ratings and only n& `won " rating.

He described these ratings as the "worst" and "ridiculous on face" in handwritten notel attached to

the presentation. He also observed that there was a "rising issue ofresearch integrity" and a

"basic inherent conflict" between investment banking and research. In a February

memorandum, Jay Mandelbaum, the global head of Salomon's retail stock selling divi ion, told

Hoffman that Salomon's "research was basically worthless."

180. As revealed in the New York Attorney General's September 20, 2002

concerning Salomon Smith Barney's allocation of "hot" IPO shares (the "IPO Compla^nt"), and

confirmed in the Citigroup Assurance of Discontinuance, Salomon involved research s^nalysts in

the underwriting process - including due diligence - and, further, in the very process

developing the lists ofpotential investment banking clients and in the "beauty contest" for

prospective investment banking services. Since the top Wall Street investment banks

traditionally charged similar underwriting fees; the prospect of favorable research eoveerage by a 0

54 a

well-recognized and widelyfollowed analyst became a key factor in a company's seie^tion of an

p underwriter. Since the mid-1990's, it was clear that, at least with respect to the

telecommunications industry section, Salomon could deliver the research coverage of ^ telecom

executive's dream: glowing analyst reports written by Jack Grubman. 0 181. Grubman was Salomon's top telecommunications analyst, and one ofthe most

powerful men on Wall Street. As observed by Ti' on August 5, 2002, "every big

investor knew Grubman was the `ax,' the one man who could make or break any stock in [the

telecommunications] industry with a thumbs-up or thumbs-down." The financial me* referred

to Grubman as the "Pied Piper" oftelecom.

182. Although Grubman's research was presented to the public as independent, the

factors and documents revealed in connection with various governmental investiggatioi4s into

Salomon's practices demonstrate that Grubman was in no way "independent" ofthe mpanies he

covered.

183. Although Grubman was prohibited by SEC regulations from publi research on

® TyCom common stock until 21 days after the Offering, Grubman sought to promote the Offering

by hyping the telecommunications sector on the date ofthe Offering. On July 26, 2000 - the date

ofthe Offering - Grubman reiterated his "Buy" rating on Global Crossing common k and

stated that he expected Global Crossing to exceed Salomon's prior second quarter 2 revenue

estimate of $1.3 billion and adjusted EB1TDA of $383 million when Global Crossing reported

earnings on August 1, 2000. Grubman also aggressively set Global Crossing's target sock price

on July 26, 2000 at $70 per share, while it was trading at $28 .50 per share.

0 O

184. Grubman's July 26, 2000 research analyst report on Global Crossing

a materially false and misleading and was intended to-or was reckless in disregard for it impact on

TyCom's OflFering.

185. Grubman reiterated his bullish buy rating on Global Crossing common tock on [.J August 1, 2000, after Global Crossing reported second quarter 2000 operating results.

186. Similarly, Grubman's efforts to inflate the telecommunications sector pifior to the

"we believe WCOM is categorically the best combination of growth and value in their sector. We

believe this stock will double by the middle to end of next year," and (ii) his July 20, 2000 Qwest

0 research report with a $80 price target, at a time when Qwest common stock was at $55.63

per share.

187. As revealed by documents produced by Salomon to the New York State Attorney

General, Grubman admitted in an internal e-mail that he only failed to timely dowpgraie the

telecommunications stocks in his sector, including Global Crossing, in June 2000, prior to the a Offering, because ofpressure from his investment banking colleagues. In a June 2001 mail to

Kevin McCaffrey, Salomon's head ofU.S. research management, Grubman observed:

[M]ost of our banking clients are going to zero and you know I wanted to downgrade them months ago but got huge pushbeck from banking. I wonder what use bankers are if all they can depend on to get business is analysts who recommend their wng clients.

188. At about that same time, Grubman emailed a research colleague about aft upcoming

dinner meeting at which he expected to hear two senior investment bankers complain a,out some

0 of his recent commentary on telecom stocks. Grubman stated: "Screw [the

p We should have put a Sell on everything a year ago."

189. Grubman's conflicted role as both investment banker and analyst did Sn

unnoticed by Salomon's own brokers. As shown in documents referenced in the 0 General's September 20, 2002 complaint and the Citigroup Assurance of Discon

numerous former Salomon retail brokers who worked with Grubman believed that ,8

® stock ratings - and in particular his ratings on Global Crossing, Qwest, and

false and misleading:

Our blind support of banking (a la WCOA is hunting our retail clients. W recent SEC company communication restrictions, analysis is more important ever. We cannot afford an overpriced cheerleader like Grubman.

a Grubman's analysis and recommendations to buy (1 Ranking) WCOM [WorldCom], GX [Global Crossing], Q (Qwest} is/was careless;

0 His ridiculously bullish calls on WCOM and GX cost our clients a lot of

0 How can an analyst be so wrong and still keep his job?

190. On July 18, 2001, notwithstanding the decline in TyCom common to $14.55

0 per share, Grubman reiterated his "buy" rating.

191. On April 28, 2003, a joint press release of the SEC, New York Attorney General's

Office, the NASD, the NYSE, and the North American Securities Administrators Association 0

57 a 0

announced the conclusion of "joint investigations by the regulators of allegations of

influence of investment banking interests on securities research at brokerage firms." u global

settlement involved ten investment banks and two individual analysts. Three ofthose

Salomon, Goldman Sachs, and Merrill Lynch, are Underwriter Defendants in this actin. One of

the two analysts is man.

192. Salomon agreed to pay $400 million to resolve the investigation, incl $150

million in penalties and $150 million in disgorgement, the largest penalty assessed alp inst any of

the ten firms.

193. Salomon has also agreed to pay $2.575 million to investors to settle c similar

to the claims asserted in this action regarding its activities as underwriters and analysts

with regard to the issuance and trading of WorldCom securities.

194. The Prospectus, by disclosing certain business relationships between th^

Underwriter Defendants and Tyco and TyCom, but not the more pervasive analysts' 'cts, was p materially false and misleading.

195. TyCom common stock rose $4.52 per share on July 27, 2000, as in :s reacted

positively to the Offering.

196. The Underwriter Defendants beaefitted by the first day rise in price by xercisin

their rights to purchase an additional 9.17 million shares from TyCom at the $32 offeri^g price

and guaranteeing their most favored clients a $41.265 million profit based on the tradi g price of

the shares (calculated by multiplying the size ofthe over-allotment. option (9.17 millioi shares) by

58 the amount that TyCom common stock was then trading at above the Offering price per p share)).

1. The Underwriter UWbudants' Materially FaW

197. The Underwriter Defendants began analyst coverage of TyCom on 21,

2000. Under SEC regulations, the Underwriter Defendants were prohibited from

reports prior to that date.

198. Analyst Craig Irvine of Merrill Lynch initiated coverage of TyCom wi* a near-

term rating of "accumulate," a long-term rating of "buy," and a 12-18-month target of $60

per share. On October 17, 2000, Irvine reiterated that rating and price target.

199. Analyst Frank J. Governali of Goldman Sachs initiated coverage of with a

rating of "recommend list" and a 12-month target price of $60 per share - his

private misgivings regarding the telecommunications market.

200. On August 21, 2000, Jack Grubman initiated coverage of TyCom with [] Speculative Buy rating and a $75 12- 18 month price target. Grubman's report stated:

During the fiscal year ending September 2000 we estimate that this business (which currently represents 100% of TyCom's results) will grow revenues 5: to $2.3 billion; the company is EPS positive today.

We continue to view the subsea business as one ofthe industry's major both and believe that demand for city will continue to ouatstr p supply. Dmmd& consuting firm to Yam Group projects a five year demand CAGR of more than a 120% for Transatlant4c and Transpacific circuits. O

0 E

We would argue that both Global Crossing and TyCom represent attractive invest is at these levels, am gm jad" up" - - =pub ofthe Woftdft MOL"U. amore, TyCom into bw Q for itself creates a single ratiodal competitor as opposed to a cue of paten irrational competitors....

***

E-1U Most importantly, we would argue with the premise that the consequence of TyCom entering into this market will create more supply than there would havt been otherwise. TyCom will be using its manufacturing capabilities to build fc itself rather than supplying many new compettitors, which is probably good for 0 industry overall. TyCom, was it not building this network, might have supplied new competitors.... From market dynamic, pricing rationale and market eoonoi perspectives, we would argue that the industry is better off having TyCom, G1o Crossing, Flag and possibly one other global network as competitors in the mar than having TyCom enable ten other new competitors to enter the market.

We have been unabashed bulls on the demand of bandwidth over the years.... one looks at all the subsea networks being built around Europe, Africa, Asia, F Asia, transatlantic and transpacific, they amount to 40 terabits of capacity vers the ISO terabits of demand forecast by Yankee Group. Ultimately, we do not 1 whether the Yankee Group will be correct, but directionally their forecast tells that the demand for subsea bandwidth is going to massively outstrip supply, regardless ofthe hair cuts or tweaks made to these various forecasts. O 201. Grubman was motivated to initiate coverage on TyCom with a buy and 675 per

share price target because, unbeknownst to public investors, as alleged by the SEC in

Q against Salomon Smith Barney and Grubman, Grubman had secured shares of TyCom

stock for favored clients such as Bernard Ebbers, the Chairman and CEO of WorldCo , and

Grubman was eager for TyCom to rise in value to maximize the profits ofthose favorai clients. G

U 1.1

202. Moreover, as explained above, the analysts' positive buy ratings on T. om i a common stock were the undisclosed p g for the underwriting retention.

203. According to internal Salomon Smith Barney documents, Grubman the

August 21, 2000 research report to create an appearance that his assumptions were 0 while actually using aggressive assumptions that inflated his valuation of TyCom stock.

Thus, ]an P. Marks, a Salomon investment banker, wrote to senior executives of Asia

Crossing, shortly after August 21, 2000, in connection with that company's initial

stock offering, that Grubman, in his August 21, 2000 report, had "created the ofbeing

conservative" but in fact had positioned TyCom in Grubman's August 21, 2000 0 Jack's initiating coverage on TyCom ... came out this morning.... Obviously, including every conconceivable system in their business plan, TyCom gives 1 appearance of being conservative with respect to multiples relative to the cot despite a very aggressive mode.

204. Grubman and Governali, by virtue of their access to senior TyCom

prior to and after the Offering, and their relationship with the other large bandwidth in

the industry, knew that there was no demand for the Global Network other than

producing swaps, and in private communications (quoted above) the Goldman had

expressed misgivings on the entire telecommunications sector. Moreover, according to Employee C H, the Underwriter De&%dants had specifically directed Andrew Kowalik to falsify his1projectio s

to support the valuation ofthe Offering. Q 205. The August 21, 2000 research reports were materially false and misleading and did

not reflect the research analysts' true opinion of TyCom common stock or the to unications

H industry.

0 E.

206. In response to the August 21, 2000 analyst coverage, TyCom stock clo4ed on

0 August 21 , 2000 at $42.875, up from the previous trading day's close of $37.75, on volume of

3,674,500 shares, - approximately three times the prior week's average daily volume.

207. TyCmn common stock closed at a high of $45.438 on September 1, 20 0. On E October 18, 2000, Governali of Goldman Sachs reiterated his "recommend list" ratingI of TyCom

common stock and his $60 price target - notwithstanding his private misgivings on

telecommunications industry.

D 208. On January 16, 2001, after the close of U.S. trading, TyCom announce a `major" $82.5 million capacity sale to DishnetDSL Limited of India, on the transatlantic route the TON.

Regarding the sale, Defendant Garvey stated: 1-1 This capacity sale on the TyCom Global Network is a significant addition to e business. Our deployment ofthe TyCom Global Network is proceeding on schedule, and we believe that TON's combination of global reach, technical innovation, and flexible capacity offering have great value in the marketplace.

209. On January 17, 2001, before the opening ofU.S. trading, TyCom its

financial results for the quarterly period ended December 31, 2000. In a press release

1© "TyCom Reports 16% Increase in New Income for First Quarter; Construction of Global

Network on Schedule," Kozlowski stated:

TyCom is coming off anodwr great quarter. We believe the budness is well positioned to provide strong earnings driven by the supply of third-party system and sales of cavity on the TON. [Emphasis added.]

210. In the same press release, Garvey stated: IO

62 C

This is a great start for the year and a solid foundation for continued strong performance.... We have recorded outstanding results Cash flows f om our $ .9 billion backlog, combined with our available cash of $2.0 billion, will continue to provide the funding for the build out of the TON.

noc , and construction activities are proceeding on schedule. (emphasis added.) 0

211. On February 13, 2001, TyCom filed its Form 10-Q for the quarterly period ended

Deomber 31, 2000. In the Form 10-Q, which was signed by Swartz, TyCom 0 At December 31, 2000, we had a backlog of unfilled orders of approximately $2,933.2 million, compared to a backlog of approximately $2,941.7 million at September 30, 2000. Backlog decreased f om September 30, 2000 because w are devoting a substantial portion of our resources to designing and manuthcturing the D TGN and therefore taking on less work as a supplier of undersea fiber optic ca le . 1 systems for others. in hrAW 2MM by A S320.0 ^

IM. Backlog also includes maintenance contracts of $688.7 millon and $63 .7 million as of December 31, 2000 and September 30, 2000, respectively. D added.]

212. On February 23, 2001, after the close of U.S. trading, TyCom issued a imess release

stating that "the transatlantic portion of the TyCom Global Network (TGN), scheduled to be

placed in service in July 2001 , will have its capacity increased sooner than planned to teet demand for larger bandwidth inn ments, including wavelengths."

213. Garvey represented in that press release that TyCom's decision to increase capacity

was based on market demand: p Our discussions with customers indicate the need for protected wavelengths higher STM-level capacity increments, rather than lesser STh4 1 circuits. Our first order for transatlantic capacity, announced lest month, fell into this category.

O 0

214. On April 18, 2001, before the opening of the U.S. securities markets,

p announced its financial results for the quarterly period ended March 31, 2001. In a pmnss release

entitled, "TyCom Reports Second Quarter Earnings of 13 Cents Per Share; Company

Increases Full-Year Earnings Estimates for Fiscal 2001," Garvey staled: a We're pleased to have recently signed two major system supply agreements f the AsiaPacific region: SEACN, which was signed during the quarter, and FLAG Pacific, announced earlier this week...Tl ese agreements will add to our backlog and help sustain cash flow. Qu O= S2.5-billion bidda also MO= 0 anm oximstely million of a nun d e tv salm nn hnth ti trans 'n mM, but does not yet include these two systems, which will result in an additional $2 billion in bookings. [Emphasis added.]

0 215. In response to the information disseminated by TyCom's press release

conference call, on April 18, 2001, TyCom shares rose $3.72, or 26%, to $18.25.

216. On May 11 , 2001, TyCom filed its Form 10-Q for the quarterly period U March 31, 2001. In the Form 10-Q, which was signed by Swartz, TyCom reported:

At March 31, 2001, we had a backlog of unfilled orders of approximately © $2,522.6 million, compared to a backlog of approximately $2,941 .7 million at September 30, 2000. Backlog decreased from September 30, 2000 because w are devoting a substantial portion ofour resources to designing, constructing and deploying the TON and therefore taking on less work as a supplier of ndwlv^ fiber optic cable systems for others. This do== in Wdda zxmdWy

!0 TGN. Backlog as of March 31, 2001 excluded an estimated $2.0 billion of anticipated bookings related to the SEACN and FLAG Telecom. Backlog also includes maintenance contracts of $677.3 million and $632.7 million as of March 31, 2001 and September 30, 2000, respectively. [Emphasis added.] 10 217. On June 4,2001, TyCom issued a press release announcing that "the tr nsatlantic

segment ofthe TyCom Global Network ("TOM)... [has] been installed and is in the final testing

10 phase." The press release added that "TyCom has also received orders for STM-level broadband

0 0

capacity on the transatlantic system and other parts ofthe TGN in recent weeks and a portion of

218. On July 18, 2001 , before the opening of the U.S. securities markets,

announced its financial results for the quarterly period ended June 30, 2001. In a press release

entitled, "TyCom Reports Third Quarter Earnings of23 Cents Per Share; Company Also

Increases Full-Year Earnings Estimates for Fiscal 2001; Recognizes $35 Million in

® Sales on TyCom Global Network," Kozlowski stated, "TyCom's strong performance

demonstrated once again this quarter by our ability to light the first network segment Owed of

schedule and generate capacity sales earlier than anticipated."

219. In the same press release, Garvey stated, "We're pleased to be

commercial traffic on the transatlantic route ofthe TyCom Global Network, which wnt into

220. Also on July 18, 2001, TyCom spokesman Peter Ferris stated in a pres^ release

that TyCom expected earnings of 32 cents to 34 cents a share in the quarter ending SqAamber 30,

2001, higher than an April forecast of 30 cents. Ferris indicated that one ofthe masons profit

would beat estimates was because TyCom had started selling apace on the TGN. C 221. In response to this favorable news about TyCom' s financial condition,

shares rose 55 cents to $15.10.

C3 222. On August 13, 2001, TyCom filed its Form 10-Q for the quarterly period ended

June 30, 2001. In the Form 10-Q, which was signed by Swartz, TyCom reported:

.© At June 30, 2001, we had a backlog of unfilled orders of approximately $2, 9.0 million, compared to a backlog of approximately $2,941.7 million at September 30, 2 . p Backlog decreased from September 30, 2000 primarily because we are devoti a substantial portion of our resources to designing, constructing and deploying 4 the TGN and therefore taking on less work as a supplier of undersea fiber optic cable for others. Additionally, we removed the remaining backlog of $53.9 million on supply contract as a result ofthe bankruptcy filing by a customer. dagmw in badda was O on the TON. [Emphasis added.]

223. TyCom and the Individual Defendants' foregoing statements during Class

° Period were materially fain and misleading inasmuch as the purported contracts and for

the TGN, including the DishnetDSL transaction, were not in the form of sales but rater swaps of

capacity that did not qualify for revenue recognition under generally accepted D Principles.

224. Moreover, defendants failed to disclose that the first segment ofthe TON was

accelerate the build-out of the Global Network to achieve undisclosed performance

established by TyCom's Compensation Committee.

225. Although not disclosed in TyCom's January 2001 Proxy Statement, it

subsequently revealed in exhibits to Tyco' s September 17, 2002 Form 8-K that Garvey had been

inceentivized by TyCom's Compensation Committee, in a meeting conducted on Janw y 10,

2001, ifthe transatlantic network was "lit" and the first capacity sales of bandwidth oo the Global

O Network accomplished by June 30, 2001, by the promise of a $3 .0 million cash bonus 'land

200,000 TyCom common stock options. Other four other senior TyCom officers w promised

aggregate cash bonuses of $6.3 million and 370,000 cash options for meeting that objective.

0 iO

226. Defendants' representations of "contracts signed for capacity sales on he TGN

and demand for the TON were materially false and misleading inasmuch as those "contracts,"

sales," and "demand" consisted only swaps by TyCom for capacity on other netwodu4 and did

not qualify for revenue recognition.

227. A Senior Manager - Terminal Commissioning and Network Design

K), who was employed by TyCom from 1997 to September 2002 in Morristown, N* Jersey,

10 confirmed that Defendants were "swapping." According to Employee K, the "bigge t problem"

was that the company was recognizing IRU's and capacity swaps as revenues, when,

GAAP, it was inappropriate to recognize such revenue. Employee K brought up the 10 swapping at a "townhall meeting" with senior management and asked how they were going to

"make money" on them. Instead of responding, the executives gave Employee K a

228. Employee H confirmed that "swapping" was a familiar practice at TyC^om, stating

that TyCom would take a large block of dark fiber and exchange it for dark fiber on 10 company's proposed cable network. When Employee H asked Kowalik about the "sv apping,"

he stated to put it in the business plan and the forecast.

I Q 229. Employee C said that TyCom swapped capacity with other carriers vnt^out the

auditors knowing. No funds would be exchanged but they would price the dark wire 4t the going .

rate and recognize it as revenue. This was done by TyCom to fitly boost their revenue

numbers.

O 0

230. An internal company document (annexed as Exhibit B) entitled "TGN^Bandwidth

a Sales Through MidSeptember 2002" establishes that the purported sale to Dishnet refacnced in

the January 16, 2001 press release was merely (i) a swap of capacity, on the SEACN network,

that TyCom was building for Dishnet, for (ii) capacity on TyCom' s Global Network. The full 0 entry with regard to the Dim "sale" sties: "Cu mer not carrying traffic. Deal o1ved

SWAP of capacity on forthcoming SEACN system to India. The first two 10 0bps :VClengt

0 [on the TON] were subsequently resold by Siva to Williams in another swap type dea4 to show

revenue for SEACN." (References to "Siva" are to the Chairman and owner of

231. Exhibit B establishes that the only transactions that TyCom engaged b for "sales" 0 of bandwidth in excess of $720,000 from inception ofthe Global Network through

September 2002 were not actually revenue generating transactions but merely three OLU swaps --

F (i) the Dishnet swap, (ii) a Qwest swap valued at $140,000,000 described as "Custom+ r not

carrying traffic. Deal involved exchanged for terrestrial capacity on Qwest's Europeai network,"

and (iii) a Emergia swap valued at $40,000,000, described as "Deal involved exchant for a capacity (or right to sell capacity) on SAM-1 system South America to Florida."

232. In contrast, the sum of the other twelve, nonswap lease transactions, ir4dicated on

IQ Exhibit B, which are the only other sales purportedly achieved by TyCom on the Giob^l Network

through mid-September 2002, is only valued at $3,436,651.

233. Specifically with regard to the SEACN IO and FLAG Telecom transaction, according to Employee B, wither the SEACN nor FLAG Telecom contracts were com4leted:

0 O

I don't we how they had any revenue recognition, because they didn't have any rove a [on the

® transaction]. We probably gave them the money to give back to us." "[The FLAG

was the stupidest thing I had ever seen. We didn't think FLAG had a shot or a chanc^ that it

would succeed as a company." Employee B also informed plaintiff that defendant 0 accompanied him on sales meetings and had actual knowledge that TyCom was unab$e to sell

capacity on the TGN except through swaps of bandwidth.

0 234. An internal Global Crossing e-mail, quoted in the Consolidated Class

Complaint in 02 Civ. 910 (GEL) (S. 3.N.Y.),

emphasizes TyCom's willingness to participate in fraudulent transactions intended to 0 TyCom's and Global Crossing's reported financial results:

Jost got off the phone with Brian Roussel = my counterpart at TyCom. It had [Andersen] and [Fricewaterhousecoopers] together all day and think that PW( 0 will not give them the accounting treatment they need - this is on the structure Perrone suggested and their CFO agreed to: we are buying transatlantic wave, under a capital lease IRU. They are buying their GNO from us structured as a operating lease. Even THAT may not be allowed. The suggestion that Brian Roussel had was for TyCom to buy from (Global Crossing], we can buy from Dishnet and Dishnet buys from TyCom - essentially putting Dishnet in the mig This could work if TyCom agrees to a "quiet e4oyment" letter for us stating tl if Siva doesn't pay or get financing, or an)rthing, that -they won't turn us off. W have a rather strongly worded letter that TyCom is already reviewing which w ask for as security for the Dishnet deal.

235. The IRU swaps essentially exchanged capacity for capacity and, as sue

constituted nonmonetary exchanges under APB No. 29. The IRU sales were, in fact,

Q transactions pursuant to which TyCom was obligated to purchase a like amount of cap^city with

the same market value as the capacity sold.

69 0 3. TyCom's Amy Fad sd Mkiading

236. On January 29, 2001, TyCom filed its 2001 Proxy Statement.

237. Tbe Proxy Statement disclosed, as stated by Grubman to Garvey the

Offering, that the Offering had made Garvey rich, and at the same time misrepresented that the

Offering and Global Network had been a success:

[Gravey' s] cash bonus for the period October 1, 1999 to the end of fiscal 2001 was $7,273,724.... Mr. Garvey was charged with leading TyCom through the initial public offering, while at the same time meeting stiffpe nance earni criteria... In addition, as an incentive to continue guiding TyCom and motive worldwide employees to reach the Company's objective of owning the world': longest, most extensive, and most technologically advanced undersea network Mr. Garvey received options to purchase one million shares at the time of the initial public offering which vest pro-rat over four years.... He also received options to purchase Tyco shares from Tyco prior to the initial public offering.

0 238. In the section entitled, "Board Compensation Committee Report on

Compensation," the Proxy Statement further misrepresented the independence of one pf its Board

0 members (at 10):

The Compensation Committee ofthe Board of Directors includes three independent directors who have no interlocking relationships with TyCom thw are subject to disclosure.

239. The Proxy Statement was materially false and misleading because it faded to

disclose that consistent with the practice of corrupting the integrity of Tyco and TyCoon's

0 corporate practices, Kozlowski and Garvey had made over S 14 million in loans to Wiliam V.

Musser, one ofthe members of the TyCom Compensation Committee and one ofthe

1-1 10

"independent" directors on the Board. (Masser was also a guest at Dennis Kozlowso's infamous 19 birthday party in June 2001 for Kozlowski's wife in Sardinia.)

240. In the section mtiitled, "Certain Relationships and Related Tm=cfioa*- the

Proxy Statement stated (at 16):

Mr. Garvey received relocation loans from Tyco in the aggregate of $3 millio* on June 23, 2000, which remained outstanding on September 30, 2000.

10 241. The January 29, 2001 Proxy Statement was signed by Defendant

242. The statements in the January 29, 2001 Proxy Statement concerning G^rvey's

relocation loans were materially false and misleading when made, because, as later .1C Defendants failed to disclose that in addition to the $3 million loan relocation loan th4t was

reported, Defendants Kozlowski and Swartz had tens of millions of dollars of

]a Corporate Loan Program and relocation loans outstanding and had used the proceeds from the

TyCom Offering to repay over $50 million in undisclosed personal loans that those

borrowed illegally from the Company's corporate relocation program. 10 1. TyCom Expa Bees A In Stack Prks As Information

10 243. TyCom stock began a long decline in value from its high of $45.4375 September 1, 2000, to a low closing price of $7.41 on September 27, 2001 (the last da' of the

Class Period), as a result of a series ofpartial disclosures concerning reduced demand, over- IO supply, and declining pricing of bandwidth - facts all of which were known to defendants at the

time ofthe Offering.

0 10

attributed the decline in TyCom's common stock to the oversupply ofbandwidth 10 plummcang bandwidth prices:

[I]n a market where prices are dropping 70% per year and 100% :annual dam increases have to be shared by as many as ten new operators on thick routes, TyCom rams the risk ofrunning itself into the ground. 1Q 245. After the close oftrading on March 1, 2001, TyCom competitor

reported that it had lost $355 million, or 55 cents a share, for the year ended Deceml r31,2000. 10 360networks further announced that it was scaling back its forecasts for profit, rever e and

capital spending to deal with a slowdown in the telecommunications industry, cuttin its 2001

revenue forecast by about $700 million to a range between $2.4 billion and $2.6 bill n, and

revising its 2001 gross profit forecast to a range of $1.8 billion to $1.9 billion, down nom its

earlier estimate of $2.6 billion. 10 246. In reaction to this announcement, TyCom stock, which had traded as 8h as

$25.09 in the preceding week, closed down at $18.04 on March 2, 2001, on trading fume of 4.8

IQ million shares.

247. TyCom announced on March 2, 2001, in an attempt to dampen the Wt of the

360networks announcement on its stock price, that it would buy back as much as million of 10 its common stock on the open market.

248. TyCom's buy-stock had the effect oftemporarily buoying TyCom's stock price in

10 early March 2001.

249. However, the price of TyCom stock soon continued its decline and closed at $9.99

on April 4, 2001. I0

0 G

250. On April 26, 2001, Governali (of Goldman Sachs) reiterated his "recd il list"

Q recommendation on TyCom common stock, but cut the price target to $40 to $60 per

251. An April 12, 2001 Business Wire article entitled "Bandwidth Glut

TeleGeography Adds Up the Numbers" stated, in relevant part:

It has been a tough year for bandwidth investors. Just one year ago, many tale analysts foresaw a nearly limitless pool ofdemand for bandwidth, driven by exponential increases in Internet use and high-bandwidth applications such as videoconferencing . The crash ofthe technology sector has since cast these projections in doubt.

In its new report, TeleGeography compares " -up" demand models with original "top-down" research. The Washington, DC-bas d research group has carefully analyzed the popular approaches for predicting end-um and tested them against actual network deployment.

"An initial glance at the results of our analysis may frighten some investors, b+t a closer look will comfort others," explains Tim Strange, Director of Research.

Most models forecast demand) based on end-user traffic. To test the accuracy ofthis approach, TeleGeography built an historical inventory ofbandwidth actually in voice and data networks. Alarmingly, TeleGeography's research shows that n al © bandwidth ceployments are far smaller than predicted.

252. On April 17, 2001, TyCom issued a press release stating that "it has ag eed in

o principle, with FLAG Telecom for the two companies to join their previously

transpacific networks in a joint development fit" - wknowledgmg the lack 4f demand

for an independent network. [J 253. On June 22, 2001, The MU RumW QWjW reported that prices

bandwidth were falling "as much as 60%" and that the "amount of underused long-ha4l fiber

p capacity in the U.S. is about 97%."

73 iQ 254. On August 8, 2001 , with TyCom common stock trading at $11.40 per share, Jack

Q Grubman downgraded TyCom common stock to "neutral" from "buy." Even then, bman

only reduced the rating to "Neutral," not "Sell."',

255. An internal Salomon e-mail made public through the various investigLtions by the

SEC and various other governmental departments establishes that Salomon had tume i negative

on TyCom long before the August 8, 2001 downgrade. An e-mail from a member of ubman's

0 team, Arzu Cevik, dated February 28, 2001, when TyCom was trading at $19.75 per 4harc, states

that when it came to the "names [to] absolutely stay away from": a [Y]ou have to be careful with WCO [Williams Communications] (they need money), T [AT&T] is dead money until restructuring and I would keep an eye on WCOM [WorldCom]. Also don't like TyCom or 360 (Tsix).

256. As referenced in the Attorney General's IPO Complaint and the E Assurance ofDiscontinuance, it was Grubman's practice not to. downgrade TyCom

stock or other issuer clients so as not to adversely impact Salomon's invest p relationship with TyCom or other companies within the telecommunications industry hat would

be affected by such a downgrade.

257. According to Employee B, during the fourth quarter of fiscal 2001, 0 engaged in conversations with its outside auditor PrieewaterhouseCoopers LLP

concerning the appropriate accounting treatment for TyCom's swaps of bandwidth.

financial statements that classified those swaps as revenue.

258. On October 4, 2001, Tyco announced an initial offer to buy-back the T^ Com

C C

shares it did not already own for .2997 shares of Tyco common stock per TyCom

0 259. TyCom's public shareholders, who were unaware at that time of the

misconduct and the false statements in the Prospectus and subsequent open market

commenced ten separate actions in three different states against TyCom arguing that .2997 0 Tyco share offer undervalued TyCom's business.

260. On October 19, 2001 , the Individual Defendants caused Tyco and to

announce before the opening oftrading that they had entered into a definitive whereby

a subsidiary of Tyco would reacquire the outstanding 11 % minority interest in

(representing approximately 56 million. common shares) at a ratio of .3133 shares of

common stock for every outstanding share of TyCom common stock - an increase of 36

shares of Tyco common stock from the initial offer.

0 261. On December 17, 2001, the effective day of the merger, Tyco stock

closed at $55 .80 per share, making the effective acquisition price oftthe merger $17.40 per share.

0 262. Employee B has informed plaintiffs that it is his belief that Tyco the

minority interest in TyCom common stock to avoid TyCom issuing separate audited

statements for fiscal 2001. According to Employee B, those fiscal 2001 audited O statements would have revealed the lack of demand for TyCom's bandwidth capacity the

extent to which the purported demand and contracts had been represented by IRU

C•1 transactions that did not qualify for revenue recognition under GAAP.

263. In fact, Tyco in its Form 10-Ks for fiscal 2001 or 2002, did not disclos TyCom's

bandwidth sales for those fiscal years. Only in Tyco's Form 10-K for fiscal 2003, issued on C-1

75 r•^ I G

December 17, 2003 (at 63) did Tyco reveal that total TyCom net revenues for the 7

p buses in fiscal 2001 were only $1.7 million - substantially below defendants'

representations during the Class Period.

264. The other telecommunications companies underwritten by Salomon d Goldman 10 suffered a similar fate as investors gradually become aware,,duriag the Class Period, fthe gross

oversupply of bandwidth:

10 12/17DI Stock Price

Global Crossing $28.50 $ 0.56

10 Qwest $47.56 $13.44

Flag Telecom $18.00 $ 1.55

10 Level 3 $76.44 $ 5.60

360networks $17.56 $ 0.08

J ' ANIMMINIM to 265. The Individual Defendants' true underlying motive for the Offering wf 9 not

revealed to TyCom's investors until September 12, 2002, at which time it was first pu

10 revealed that the Offering was utilized by Korlowshi and Swartz for personal profit a to r"EM

bonuses to repay their undisclosed relocation loans.

10 266. Prior to September 12, 2002, TyCom's public investors had no reason io suspect that defendants had engaged in any misconduct.

267. On September 12, 2002, Tyco issued a press release that specifically depcribed 10

'0 E

defendant Kozlowsld' s misconduct. The September 12, 2002 press release announced that Tyco

O lead'filed suit against ... Kozlowski, charging that he misappropriated money and as ets from the

Company and engaged in a concerted pattern of conduct to conceal larcenous acts finfm the Board

ofDirectors."

268. According to the press release, the lawsuit filed by Tyco "ac [d] K^Wowski of

fraud and self-dealing that included, among other actions: abusing Tyco 's relocation and Key

0 Employee Corporate Loan programs and obtaining under false pretenses loans that 1 used to

fund personal expenditures; misappropriating for himself over $100 million,

unauthorized bonuses totaling $58 million and unauthorized loans of over $43 milliox; taking

personal credit for more than $43 million in charitable donations that actually were m$de by

Tyco; and engaging in a number of self-dealing transactions involving property he sold the

0 Company at inflated prices and real estate that was used by him and his family

compensating Tyco."

269. The lawsuit, which was brought only on behalfof Tyco, sought "to rec ver all

funds misappropriated from Tyco for Kozlowsid himself or awarded by Kozlowski to his senior

executives and key managers without appropriate authorization from the

O Committee ofthe Board of Directors, plus damages and other forms ofrelief" inch "at a

minimum, the recovery of all unauthorized compensation paid by Kozlowski to other

from 1997 to 2002, repayment of outstanding loans he improperly borrowed from Tyc^, and the O forfeiture of all income and benefits received by him from 1997 to 2002.11

270. The press release identified the following "specific actions through which

0 Kozlowski failed in his duties to Tyco:"

;O 0

• Abuse of New York Re xtionProgram - In 1995, after the decided to relocate to New York City, Kozlowski transformed a Compensation Cbmmittee- 0 approved relocation program intended for all employees into a special program for a few senior executives that was never sanctioned by the Board....

Kozlowski know that the benefits to him and other key executives such a program required Compensation Committee approval and never soug! it such approval from the Board.

• . Abuse of Key Empbyee Loan Program - The long-standing Key Employee Loan Program (KEL) was designed to encourage stock ownership p by executives by obviating their need to liquidate shares to meet tax l ilities. However, Kozlowski systematically abused this program, turning it in^o' a personal line ofcredit. From 1997 to 2002, he took more than 200 from the program, borrowing more than $274 million, ofwhich more than $24 million was not used in accordance with the purpose of the program. Instead, lie used p these funds for a wide variety ofpersonal needs, including purchases feverything from homes, yachts, antiques and furniture to payments to his domesti help.

• Unauthorized Credits to KEL Program - To offset his indebtedness to Tyco, without the knowledge or approval of the Bm Kozlowski directed Chief Financial Officer Mark Swartz to effect crec of $25 million to Kozlowski's KEL account and $12.5 million to Swai account. (When the Board learned of these unauthorized journal entrie during the course of the investigation, it directed that they be reversed. Kozlowski continued to abuse the KEL program, and when he left the 0 Company on June 3, 2002, he owed this program $43,840,461, plus interest, all of which is due.

• Unauthorized Florida R don Program -- Air the 1997 © reverse merger with ADT, Kozlowski decided to relocate more than 40 corporate employees to ADT's U.S. headquarters in Boca Raton, Florida and created a new relocation program by appropriating the terms ofthe earlier New York program. He circumvented the need for Compensation Committee approval ofthis program by creating a program somewhat p similar to the New York program. As in New York, he created two versions of the program, one for general use that met the IRS standards and a second for the use of a few executives. Without changing his primary residence, Kozlowski used this program to obtain $29,756,110 in interest-fine loans to assemble five lots into a compound and build p estate in an exclusive Boca enclave-called "The Sanctuary." Kazlo

78 n

did not obtain Compensation Committee approval of this program concealed these benefits from the Board. S • "TyCom Hoses" - Unauthorized Forgiveness of Relocation L - In September 2000, Kozlowski still owed Tyco more tbon $37 milli n, so he "contrived, promoted and fraudulently executed" a plan to obtain retie He falsely informed the senior VP of Human Resources that the Board had decid Id to 0 forgive all of the Florida relocation loans to the more than 40 employe s-and to "dross on this benefit by making each employee whole on an after-ta, basis for the forgiveness - as a reward for completion of the TyCom IPO. The L loan and gross-up program was in addition to a more limited prograni ifcash bonuses and restricted stock awards that the Compense Committee - unaware C of the Kozlowski program - approved the next month. KoxlowAd's uc program cost Tyco close to $100 million, including Kozlowski's share $32,644,338.

• ChwihMe Cos ions - From 1997 to 2002, Koziowski committed donations and pledges to charitable organizations with Co y money amounting to more than $106 million. At least $43 million oftI ow donations were made for his personal benefit or were represented as hi personal donations....

271. On September 17, 2002, Tyco filed a Form 8-K with the SEC further 0 and describing Tyco's findings in its investigation of what it termed (at 5) to be a

"pattern of improper and illegal conduct by which [Kozlowski and Swartz] enriched

2- at the expense of the Company with no colorable benefit to the Company and concealid their

conduct from the Board and its relevant committees." The September 17, 2002 Form 8-K also

stated (at 4) that "the former executives ' misconduct [had] harmed Tyco's reputation 2 credibility with investors, lenders, and others."

272. According to the September Form 8-K (at 14), defendant Garvey also ",orrowed

C7 $5 million in relocation loans related to his relocation to New Hampshire in 2000."

79 E

273. The pattern of illegal and inappropriate conduct included the practice of makin8

undisclosed "relocation loans" to selected officers and/or executives of Tyco. Although Tyco

had adopted and implemented a relocation program that, by its terms, "bras intended lot to

discriminate in scope, terms or operation in favor of executive officers or directors ofitthe O Company," in 1995, the Form 8-K revealed that defendant Kozlowski nevertheless

a different, more generous New York relocation plan, tailored to the.individuel cirew astances of

p five or six executives and one assistant, which had not been authorized by the

Committee of the Board." This information was in direct contravention ofthe

contained in the Prospectus, which, as discussed above, alleged that as of September 30, 1999

the total amount of loans outstandingin8 the relocation program totaled only $18,5 9,137.

274. The Form 8-K revealed that as of September 17, 2002, defendant Kozl iwski had

p "improperly borrowed approximately $29,756,000 in non-qualifying relocation loans ^o purchase

land and construct a home in Boca Raton, Florida during the years 1997 to 2000, and

borrowed approximately $7,012,000 in non-qualifying relocation loans to purchase a p apartment in New York City in 2000," and had also borrowed an additional $24,922,849 in

interest free loans, bringing his total amount of unauthorized interest free relocation lava to

0 $61,690,628.

275. Defendant Swartz received a total of $33,097,925 in unauthorized interest free

loans (including $7,862,532 in loans outstanding as of September 30, 1999) and H Garvey received a total of $5,000,000 in unauthorized interest five relocation loans.

276. The September 17, 2002 Form 8-K contained a discussion titled "The "' Com

;p 26, 2000 Prospectus, Tyco was motivated to make the public offering of TyCom on July

C"1 26, 2000 to generate funds to forgive the unauthorized interest-free loans and the need to include the full charges for the loans on Tyco's financial statements. Form 8-K

revealed, in relevant part: a In September 2000, Mr. Kozlowski caused Tyco to pay a special, unapproved bonus to 51 employees who had relocation loans with the Company ..The bon was calculated to forgive the relocation loans of all 51 employees, at a total of $56,415,037, and to pay compensation sufficient to discharge all of the tax liability due as a result of the forgiveness ofthose loans. TIds action was portedly related to the successful completion ofthe TyCom Initial Public Offering. The total gross wages paid by the Company in this loan forgiveness program were $95,962,000, of which amount Mr. Kozlowski received $32,976,000 and Mr. Swartz $16,611,000.

These benefits were not approved by, or disclosed to, the Compensation Coma Eittee or the Board of Directors. Indeed, the opposite occurred: each ofthe fifty-one partici, gating D employees who was offered the forgiveness was asked to sign a confdentialit3 agreement in which they agreed not to disclose either the fact of the bonus or its terms to inyone other than the recipient's persoflal financial, tax or legal advisors. Breach ofth confidentiality agreement would result in forfeiture ofthe bonus. Some emplo cc beneficiaries of this forgiveness were not even permitted to keep a copy of the r signed q agreement.

According to Ms. Patricia Prue, Tyco's Senior VP of Human Resources, Mr. I azlowski told her to process the forgiveness and the gross-ups and asserted that the Boo I had q approved the program. Upon Ms. Pruds imp" fbi Ofthe Bud rization, Mr. Kozlowski sent her and her supervisor, Mark Swartz, a memo on Septem) r11, 2000, for her files indicating that "a decision has been made to forgive the relc stion loans for those individuals ...whose efforts were instrumental to successfully the TyCom IPO." Attached to the memorandum was the list of employees whi were to receive the forgiveness benefit.

277. By Tyco' s own admission in its Form 8-K, the Prospectus Dd that

defendants' primary motive for issuing stock to public investors in the Offering was Support

C o

the development of TyCom's global telecommunications network, thereby creating illusion of p the probability of benefitting TyCom's shareholders in the future as TyCom continued to expand

its business. The Prospectus failed to disclose the Individual Defendants' intent to the

proceeds from the initial public offering to forgive millions ofdollars it had issued

unauthorized loans, as described in the aforementioned Swartz Memorandum.

278. Each of defendants Kozlowski and Swartz are currently subject to cri^ D charges relating to their "larcenous acts."

279. On a conference call with investors before the opening of the U.S. swaities

informed investors that Tyco would take a pre-tax charge of $2.0 to $2.5 billion to 'te-down

the value of TyCom. Breen said that the charge was necessary because TyCom had

building global fiber-optic network amid a glut of such capacity.

280. Tyco closed on September 25, 2002, in the aftermath ofthe revelation Ofthe

Q Individual Defendants' larcenous acts and the write-down of TyCom's value, at $15. , making

the imputed value of class members' TyCom shares (based on the .3133 exchange )

approximately $4.70 (as compared to the $32.00 offering price). O 281. Plaintiff and the members of the Class would not have purchased shares pursuant

to the Prospectus or would not have purchased those shares at $32.00 on the Offering at the

market price subsequent to the Offering if the true facts cowming the Individual Deflodants'

executive compensation and anticipated bonuses had been disclosed in the Prospectus

82 1©

a material positive impact on Tyco's stock price. Tyco's stock price rose from $6.12 per share

on January 18, 2000, the first trading day after Tyco first announced the proposed Of Zing, and D closed at his class period high of $58.50 per share on September 1, 2000, the same day as TyCom

closed at its Class Period high of $45.4375 per share.

common stock from the TyCom Offering by selling large blocks of Tyco's stock at artificially

inflated prices without disclosing the material adverse facts about TyCom to which they were

privy. Such sales were unusual in their amount and in their timing. The numerous repeated

insider sales by the Individual Defendants imposed upon them an additional duty of fidl

284. The following table shows the heavy insider selling (totaling more that $675

Q million) by Kozlowski and Swartz during the Class Period:

INDIVIDUAL CANTS' CLASS PEJUOD 'ENSEDER SHARES Nam Date $ Value a L. Dennis Kozlowski 09/07/00 54, 57,822.76 09/07/00 54, 57,822.76 09/07/00 26p" :95,411.49 a 09/07/00 26 95,411.48 09/07/00 1, 84,883.28 09/07/00 1, 84,883.28

83 0 09/11/00 57, 50,598.83 U 09/11/00 57 50,598.83 09/11/00 13, 7,671.83 09/11/00 13, 7,671.83 09/11/00 37,591.00 09/11/00 37,591.00 09/12/00 12, 05,661.75 a 09/12/00 12, 05,661.75 09/12/00 2, 90,017.00 09/12/00 2, 90,017.00 09/12/00 92,488.50 09/12/00 92,488.50 09/14/00 5,( 27,393-90 09/14/00 5,( 27,393.90 C 10/24/00 32 87,500.00 10/31/00 8 89,750.00 01/30/01 21 980,00.00 0 06/20/01 5,716,237.60 07/03/01 8, 21,900.00 08/01/01 6 55,542.40 G TOTAL S x,66

Mark H. Swartz 09/07/00 21, 58,521.16 09/07/00 21, 58,521.16 09/11/00 53,170,138-34 09/11/00 53, 70,138.34 U

84 O

09/12/00 11 48,571.00 O 09/12/00 11 48,571.00 10/24/00 16 93,750.00 10/31/00 4, 195,875.00 O 01/30/01 10, ,000.00 02/01/01 6, 81,119.68 06/20101 2, 1,870.01

a 07/03/01 4 60,950.00 TOTAL $218, 38 49

Nail R. Garvey 10/24/00 1,440,802 0 06/18/01 ,185,000

TOTAL SA2

O 285 . In addition to their open market sales, Kozlowski and Swartz sold numerous Tyco

shares to Tyco. Due to a loophole that does not require immediate disclosure of sales of stock by

company executives - regardless oftheir magnitude - when the sale is made to the ' O company, these sales were not reported until the filing of a Form F-5, up to thirteen nths after

the sales. Although the proceeds from these sales are not disclosed in the Form F-,5, plaintiffs

million.

286. According to the complaint filed by Tyco against Kozlowski in September 2002, O another Kozlowski deception about his purported compensation in 2001 related to the vesting of

290,000 Tyco shares for Koalowski's executive officers and key managers as the resin of a

® purported gain on the swap of TyCom shares for an equity interest in Flag Telecom Holdings Ltd.

85 UO

("Flag"). The Company reported a $79,264,700 gain associated with the swap of Dm Shares

10 for the Flag equity on June 20, 2001 (based on the then inflated price of TyCom on stock -

$14.57 per share). According to the complaint, shortly thereafter Kozlowski d the

accelerated vesting of shares to various key individuals, including at least 155,000 gyres for 10 himself; 77,500 for Swartz; and 60,000 shares for certain of Kozlowski's other executives

and key managers, based upon that apparent gain on the transaction. Those shares re sold iC back to the Company and cash delivered to the recipients in August 2001. did not

seek or obtain approval for his own and Swartz's bonuses until two months later, at e October

1, 2001 Compensation Committee meeting. By this time, the gain had become an alized loss ]O as a result ofthe decline in Flag Telecom common stock - significantly in excess of e June 20

gain - yet the Committee was misled into awarding the bonuses "in conjunction with the gain on

the sale of TyCom shares." Kozlowski never sought any approval from the 10 Committee for the grant of shares awarded to the other senior executives and key The

total cost to the Company relaxed to the award of these shares exceeded $15,378,700. ^ than

10 half of this amount, $8,219,650, accrued to the benefit of Kozlowski individually.

COUNT I

Against AM Dehodsoft for Violatl of Section II and Apinst Tyco the I

287. Plaintiff incorporates each ofthe foregoing paragraphs as if fully set rd3 herein IQ except those allegations that sound in fraud which are specifically excluded. This gat is

asserted against all defendants for violations of Sections 11 and 15 ofthe Securities ct,15

10 U.S.C. §§ 77(k) and 77(o).

C is

288. TyCom is the issuer ofthe stock sold pursuant to the July 26, 2000 Pn)spec

Defendants Kozlowski, Garvey, and Swartz signed the Registration Statement that mcorpc'

the materially false and misleading July 26, 2000 Prospectus. Kozlowski and Swartz were

officers and directors ofthe Company at the time of the Offering. The Underwriter I0 were the underwriters ofthe Offering.

289. The Registration Statement, and accompanying Prospectus, were and

make the statements made not misleading, and failed to disclose material facts as

above. 0 290. Defendants Kozlowski, Garvey, and Swartz, as directors and officers c}f TyCom

and as signatories ofthe Registration Statement accompanying the July 26, 2000 Pry

filed with the SEC, and the Underwriter Defendants, as underwriters of the Offering,

responsible for the preparation of the documents and failed to make a reasonable investigation or

possess reasonable grounds for believing that the representations contained in those

were true and that they disclosed all material facts.

291. Plaintiff and the other members ofthe Class acquired shares of TyCon pursuant

to, or traceable to, the July 26, 2000 Prospectus without knowing ofthe untrue fttem^nts or

omissions of material facts.

292. Plaintiff and the other Class members have sustained damages.

293. Defendants Kozlowski, Swartz, Garvey, and Tyco were controliingper^ons of

TyCom and had the ability to cause the corporate defendants to engage in the misconduct alleged

'O G

herein.

G 294. This action was brought within one year after the discovery ofthe

statements and omissions and within three years after TyCom common stock was offfrod to the

public. C 295. By virtue ofthe foregoing, defendants have violated Sections 11 and 1 ofthe

Securities Act.

COUNT II

Against All Ddmdaats (Other Than MerrM Lynch) for Viola* of Sec6m 10(b) and A ! Ddemisaft Tyco sad ladvi

296. Plaintiff realleges and incorporates by reference each and every

0 contained above.

297. Throughout the Class Period, defendants participated in a course of

involving misrepresentation and concealment of adverse material information about a compensation and the business and finances of Tyco and TyCom, as specified herein.

298. Throughout the Class Period, defendants employed devices, schemes Ld artifices

0 to defraud, while in possession of material adverse non-public information and J in acts,

practices, and a course of fraudulent conduct as alleged herein in an effort to assure restors of

TyCom's unimpeded progress and expansion, which included the making of, or the licipation 0 in the making of, untrue statements of material facts and omitting to state material f i necessary

in order to make the statements made about TyCom and its business, in the light of1

O circumstances under which they were made, not misleading. This conduct operated a fraud

10 9

and deceit upon the purchasers of TyCom securities during the class Period.

0 299. Included among the misrepresentations that inflated the price of TyCom common

stock during the Class Period, were the material misrepresentations and omissions in

® Prospectus, which remained alive during the Class Period.

300. The Individual Defendants, as officers and directors of TyCom and Tyco, are

liable as direct participants in the wrongs complained ofherein. The Individual Defendants were

0 able to a did control, directly or indirectly, the content ofthe public statements and financial

statements disseminated by TyCom. With knowledge ofthe falsity ofthe statements

therein and in the reckless disregard ofthe true purpose ofthe TyCom spinoff, these fficers and

directors caused the complained of misstatements and omissions of material fact as egad

herein, and knowingly or recklessly failed in their duty to update or correct misleading smements

0 issued by them or on their behalf.

301. Throughout the Class Period, the defendants had actual knowledge a misrepresentations and omissions of material fact set forth herein, or acted with

disregard for the truth in that they failed to ascertain and to disclose such facts, even tough such

facts were available to them. H 302. The Individual Defendants were each active participants in the Offerinj and the

operations of TyCom after the Offering. At its height, Tyco' s 86% stock ownership i4 TyCom

0 had a market value of $20.32 billion, equal to approximately 20% of Tyco's market

of approximately $100 billion. Thus, Kozlowski and Swartz, as senior officers and

shareholders of Tyco, had a financial interest in maintaining strict oversight of TyCon3. in fact, O

0 as alleged herein, defendants Kozlowski and Swartz sib the Registration S for the uc Offering and defendant Swartz signed TyCom's Form 1 O-Qs during the Class Period, had a duty

to investigate the accuracy of those statements, and were actively involved in TyCon 's business

and either knew or were reckless in failing to know that TyCom's public statements, 0 alleged I0 herein, including representations as to market demand and contracts for sale of

capacity, were materially false.

10 303. The Individual Defendants, by virtue of their authorized and bonuses

relating to TyCom and insider sales of Tyco further had a motive and opportunity to

fraud. 10 304. As a result of the deceptive practices and false and misleading is and

omissions, the market price of TyCom' s common stock was artificially inflated the Class

10 Period. In ignorance of the false and misleading nature of the representations d I above

and the deceptive and manipulative devices employed by said defendants, plaintiff at the other

members ofthe Class, in reliance on either the integrity ofthe market and/or directly nthe I0 statements and reports of defendants, purchased TyCom's common stock at ^ffRIM1=11-I

prices.

information not disclosed by defendants, or had they been aware ofthe truth behind

110

TyCom and had the ability to cause the corporate defendants to engage in the misco uct alleged

herein. HE 307. By virtue ofthe foregoing, defendants have violated Sections 10(b) 20(a) of

the Exchange Act. 10 308. Plaintiff and the other members ofthe Clays have been damaged by

violations as described in this Count and seek recovery for the damages caused therely.

WHEREFORE, plaintiff, on behalf of himself and the other members of the Class, prays

for judgment as follows: 10

Declaring this action to be a proper class action maintainable pursuant to Rul 23(bX3) of

the Fed.R.Civ.P. and declaring plaintiff to be a proper Class repres ve; 10 Awarding plaintiff and the other members ofthe Class damages suffered as a ult ofthe

wrongs complained of herein together with appropriate interest;

10 Awarding plaintiff and the other members of the Class their costs and ex ofthis

litigation, including reasonable attorneys' fees and experts' fees and other costs and

disbursements; and I® Awarding plaintiff and the other members ofthe Class such other and further

0 r.

relief as may be just and proper under the circumstances.

Dated: December 10, 2004 WOLF PER By:

Marian P. Rosner (MR 0410) Robert C. Finkel (RF 2373) © Caroline.S. Curtiss (CC 7475) 845 Third Avenue New York, New York 10022 Tel.: 212.759.4600 p CHlTWOO ? & HARLEY Stuart J. Guber Tamar M Woodward 2300 Promenade H 1230 Peachtree St eet, N.E. © Atlanta, GA 30309 Tel.: 404.873.3900

OF COUNSEL:

Jonathan Plasse GOODKIND LABATON RUDOFF & SUCHAROW, LLP 100 Park Avenue New York, New York 10017-5563 Tel.: 212.907.0700 n

92 I

p [INTI D STATES DISTRICT COURT DISTRICT OF NEW HAMPSHIRE

In re Tyco Intornaticn^al , Ltd. MDL Docket No. 02-1335-B p Multidistrict Litigation (MDL) 1335

------

ROBERT C. FINKEL, being duly admitted to practice law in the State ofNe' York,

does hereby declare under penalties of perjury that:

On December 10, 2004 I caused a true copy of lead plaintiffs' Consolidated S 'ties

Class Action Complaint, dated December 10, 2004, to be served by first class mail on the

following counsel of record for defendants in this action, and on defendant Neil Cary y, at the

following addresses:

CRAVATH, SWAINE & MOORE, LLP DEBEVOISE & PLI PTON © Frank Barron Jyotin Hamid 825 Eighth Avenue 919 Tbird Avenue New York, New York 10019 New York, New York 10022

Attorneys for Tyco International, Ltd. and Attorneys for Defendant L. Dennis TyCom Ltd. 0

DaN. 145412 Ve,*i 3053:1620 CLEARY, GOTTLIEB, STEEN & STILLMAN & FRIEDMAN, P.C. HAM LTON Michael Grudberg O Max Gitter 425 Park Avenue One Liberty Plaza New York, New York 10022 New York, New York 10006 Attorneys for Defiant Mark Swartz Attorneys for the Underwriter Defendants O Mr. Neil Garvey 1122 Ocean Road Rye, NH 03670

0 Defendant 1. p Dated: December 10, 2004 Robert C. Finkel

DocN: 145442 Vm*:1 3053:1620

0 E

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