LAW OFFICES OF JAMES V. BASHIAN, P.C. FECEIVED -CLER James V. Bashian U. S. DrSTFLCT Fairfield Commons 271 Route 46 West, Suitc F207 7Cc1 .!iL 2L P L: 01 Fairfield, New Jersey 07004 (973) 227-6330
[Additional Counsel for Plaintiff Set Forth Below]
UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY
ROSEMARIE STUMPF, on Behalf of Herself and All Others Similarly Situated, No. 'frA/,. 3 03 4,1 0 3 PIaintiff, CLASS ACTIONCOMPLANT vs. JURY TRIAL DEMANDED NEIL R. GARVEY, L. DENNIS KOZLOWSKI, MARK H. SWARTZ, TYCO INTERNATIONAL LTD., TYCOM LTD., It GOLDMAN, SACHS & CO., MERRILL LYNCH, PIERCE FENNER & SMITH INCORPORATED, and CITIGROUP GLOBAL MARKETS, INC., Defendants. Plaintiff, individually and on behalf of all others similarly situated, by her attorneys, alleges the following upon information and belief, except for paragraph 6, which is alleged upon personal knowledge. Plaintiffs information and belief is based on the investigation of her counsel, including a review of Tyco International Ltd. ("Tyco") and TyCorn Ltd. 's ("TyCom") publicly issued press releases; filings with the Securities and Exchange Commission ("SEC"), including the Prospectus filed with the SEC on July 26, 2000 (the "Prospectus"); news stories, Doc*: 136501 Val 12929 I49 analysts' reports concerning Tyco and TyCorn; and data concerning trades in Tyco and TyCom securities. NATURE OF THE ACTION 1. Plaintiff brings this action as a class action on behalf of herself and all other persons or entities who purchased shares of TyCom common stock pursuant to or traceable to the July 26, 2000 Prospectus to recover damages caused by defendants' violation of the federal securities laws. JtifJ J Cii (sr'I I 3$iSJ 2. This action arises under Sections 11 and 15 of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. § § 77k and ho, and Section lOb(5) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b). 3. Jurisdiction is conferred upon this Court by Section 22 of the Securities Act, 15 U.S.C. § 77v; Section 27 of the Exchange Act, 15 U.S.C. § 78aa; and 28 U.S.C. § 1331 (federal question jurisdiction). This Court has personal jurisdiction of the defendants pursuant to Section 22 of the Securities Act, 15 U.S.C. § 77v, and Section 27 of the Exchange Act, 15 U.S.C. § 78aa. 4, Venue is proper in this District because TyCom and Tyco maintained offices in the district during the class period and many of the acts and transactions constituting the violations of law herein complained of occurred within this District, including the preparation and dissemination of materially false and misleading financial statements and corporate documents. 5. In connection with the acts alleged herein, the dcfcndants directly or indirectly used the means and instrumentalities of interstate commerce, including the United States mails and facilities of a national securities exchange. UU IgMia 2 - LJ'•aii.1 6. Plaintiff Rosemarie Stumpf, who resides at 17 Whiting Avenue, Floral Park, New York 11001-1518, purchased TyCom common stock during the Class Period as alleged herein. 7. Defendant TyCoin is a corporation organized and existing under the laws of Bermuda with several offices in the United States. TyCorn supplics undersea fiber optic networks and services and also designs, engineers, manufactures, and installs undersea cable and cable networks. TyCom was incorporated on March 8, 2000 as a wholly-owned subsidiary of Tyco to serve as the holding company for its undersea fiber optic cable communications. 8. Defendant Tyco is a diversified manufacturing and service corporation organized and existing under the laws of Bermuda with offices located throughout the United States. Tyco manufactures, services, and installs electrical and electronic components, undersea I telecommunications systems, and fire protection and security systems. Tyco also manufactures flow control valves, healthcare and specialty products, and plastics. During the class period, Tyco owned 89% of TyCom's common shares outstanding. Tyco currently owns 100% of TyCom's outstanding common stock. 9. Defendant L. Dennis Kozlowski ("Kozlowski") was at all relevant times the Chairman of the Board of Directors and a Director of TyCom, as well as the Chief Executive Officer, the Chairman of the Board of Directors, and a Director of Tyco. 10. Defendant Neil R. Garvey ("Garvey") was at all relevant times the President, Chief Executive Officer, and a Director of TyCom. Garvey also was at all relevant times the President of the Submarine Systems, the Vice President of Tyco, and a Director 6f Tyco. -1- 11. Defendant Mark H. Swartz ("Swartz") was at all relevant times a Director of TyCom. Swartz also was at all relevant timcs the Executive Vice President and Chief Financial Officer of Tyco. 12. The defendants identified in paragraphs 9-11 may be referred to herein as "Individual Defendants." 13. The Individual Defendants each signed the Registration Statement for the Offering, which was materially false and misleading. 14. Goldman Sachs is a Delaware corporation with executive offices located at 85 Broad Street, New York, NY 10004 and which maintains offices in New Jersey. 15. Merrill Lynch is a Delaware corporation with executive offices located at 4 World Financial Center, New York, NY 10080 and which maintains officcs in New Jcrsey. On May 28, $ 2003, the NASD commenced action against Phua Young, the Merrill Lynch analyst who followed Tyco, for a series of research violations committed in connection with his coverage of defendant Tyco. Young was charged with disseminating biased research reports on behalf of Merrill Lynch that contained misleading statements and exaggerated clainis about Tyco and its operations between August 1999 and April 2002, a period of time that includes the Class Period. 16. Citigroup Global Markets, Inc., known as Salomon Smith Barney during the Class Period, is a Delaware corporation with executive offices located at 388 Greenwich Street, New York, NY 10013 and maintains offices in New Jersey. 17. Goldman Sachs,, Merrill Lynch. and Citigroup Global Markets, Inc, acting as Salomon Smith Barncy (collcctivcly, the "Undcrwritcrs"), were co-lead underwriters of the July 26, 2000 initial public offering of TyCom common stock. toc#: 136501 VI $29:14$9 -4- rL4JNTIFFS CLASS ACTION ALLEGATIONS 18. Plaintiff brings this action as a class action pursuant to Rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure ("Fed.R.CivP."), on behalf of all persons or entities who purchased shares of TyCom common stock pursuant to or traceable to the July 26, 2000 Prospectus, including shares purchased on the open market during the period from July 26, 2000 through October 19, 2001, inclusive (the "Class Period") and were damaged thereby. Excluded from the Class are the defendants herein, officers and directors of Tyco, TyCom, or the Underwriters, members of the immediate family of each of the Individual Defendants, and affiliates of the corporate defendants (the "Class"). 19. The members of the Class are so numerous that joinder of all members is impracticable. While the exact number of Class members is unknown to plaintiff at this time and $ can only be ascertained through appropriate discovery, plaintiff believes there are hundreds of members of the Class. TyCom's common stock was actively traded on the New York Stock Exchange throughout the Class Period. 20. Plaintiff will fairly and adequately protect the interests of the members of the Class. Plaintiff has retained competent counsel experienced in class action litigation under the federal securities laws to further ensure such protection; he is a member of the Class; her claims are typical of the claims of all Class members; and he does not have interests antagonistic to, or in conflict with, those of the Class. 21. A class action is superior to other available methods for the fair and efficient adjudication of this contreversy since a multiplicity of actions could result in an unwarranted burden on the Court system and could create the possibility of inconsistent judgments. Moreover, a class action will allow redress for many persons whose claims would otherwise be Dl 13001 Vcr 22i4$ - 5 - too small to litigate individually. There will be no difficulty in the management of this action as a class action. 22. There are numerous questions of law and fact which are common to the Class and which predominate over any questions affecting individual members of the Class, including: 1. whether the federal securities laws were violated by defendants' acts as alleged herein; 2. whether the Registration Statement and Prospectus omitted to state or misreprescntcd matcrial facts concerning (1) the cxccutive compensation of Tyco's senior management; (ii) Tyco's reasons for having commenced the initial public offering of a minority interest of TyCom common stock; and (iii) the business operations and finances of TyCom; and whether members of the class were damaged by virtue ofheir investments in TyCom common stock during the Class Period, and if so, the appropriate measure of damages. SUBSTANTIVE ALLEGATIONS MUTTEM 23. The Class Period begins on July 26, 2000, when TyCom filed a Registration Statement and Prospectus with the SEC for the initial offering of 61,130,435 shares of TyConi common stock at $32 per share (the "Offering"). Prior thereto, 100 0%, of the-- outstanding TyCom shares were owned by Tyco or its affiliates. 24. Goldman Sachs, Merrill Lynch, and Salomon Smith Barncy wcrc the co-icad underwriters of the Offering. DocL 136501 Vcyj 2929.140 -6- 25. As a result of the Offering, Tyco became the 89% owner of TyComcornrnon stock. False and MiafeadinE Stateet 26. According to the Prospectus, the purpose of the Offering was to finance the design and implementation of the TyCom Global Network, a proposed global undersea fiber optic network which Tyco predicted would "be the most extensive and technologically advanced" network of its kind. The Prospectus stated that $1.65 billion of the anticipated $1.85 billion net proceeds from the Offering were to be used toward the development of the first phase of the TyCom Global Network and the remaining $200 million of the proceeds would pay a dividend to a wholly-owned subsidiary of Tyco. 27, The Prospectus contained (at 66) a summary compensation table for defendants Kozlowski, Garvey, and Swartz, and TyCom's other executive officers. Included among those disclosures (at 71) was a summary of TyCom's Employee Corporate Loan Program that, according to the Prospectus, was "to encourage ownership of Tyco common shares by key employees" by providing loans to be "primarily used for the payment of taxes due as a result of the vesting of restricted stock." 28. According to the Prospectus (at 71), the sununary compensation table "[presented] the annual and long-term compensation for services in all capacities to Tyco and its subsidiaries for the Chief Executive Officer of TyCom and the other four most highly compensated executive officers of TyCom during fiscal 1999." Additionally, the Prospectus stated that: (a]t September 30, 1999, the amount of loans outstanding under this loan program totaled $18,569,137, of which SO was loaned to Mr. Kozlowski, $304,363 was loaned to Mr. Garvey and SO was loaned to Mr. Swartz. The largest amount of D%# 136501 V,rø 1 2929 1489 -7- indebtedness outstanding at any time since October 1, 1998 by Mr. Kozlowski was $52,688,249, by Mr. Garvey was $1,153,645 and by Mr. Swartz was $17,435,319. 29. The Prospectus was materially false and misleading and failed to disclose that, contrary to the representations in the Prospectus that the Individual Defendants had only $304,363 in loans outstanding to them on September 30, 1999, defendants Kozlowski and Swartz had, among other things, instituted a corporate "relocation loan" program and as of September 30, 1999 had outstanding loan balances of $35,307,668 (September 17, 2002 Form 8-K at 9) and $7,862,532 (September 17, 2002 Form 8-K at 12), respectively. 30. The Prospectus also failed to disclose that the purpose of the Corporate Loan Program was to confer substantial personal benefits on the individual Defendants rather than to encourage stock ownership by providing for the payment of taxes as the Prospectus suggested. The September 17, 2002 Form 8-K revealed that defendant Kozlowski used Tyco funds to acquire high-end real estate and make extravagant purchases as described snore fully below. 31. Additionally, the Prospectus failed to disclose that the Individual Defendants were motivated in substantial past to make the Offering so that Tyco would realize a profit on the shares to be sold to public investors; instead, the Prospectus falsely represented that the Offering was made to finance the development of the TyCom Global Network. That profit was intended to be used in significant part to pay defendants Kozlowski and Swartz and other executive officers bonuses that, in turn: would be applied by them to the repayment of their outstanding "relocation loans." 32. Plaintiff and other members of the Class purchased shares of TyConit in the Offering and in the after-market pursuant to the Prospectus in reliance on the truth of the disclosures in the Prospectus, particularly those relating to the Individual Defendants' A(A '.J I 2929 14PS. - 8 - compcnsatiOrl and the Individual Defendants' motives for spinning off a minority interest in TyCom. 33. The Underwriters began analyst coverage of TyCom on August 21, 2000. Defendant Merrill Lynch initiated a near-term rating of "accumulate," a long-term rating of "buy," and a 12-18-month target price of $60 per share. Defendant Goldman Sachs initiated a rating of "recommend list" and a 12-month target price of $60 per share. Defendant Citi group Global Markets, Inc. initiated a rating of "buy" and a 12-month target price of $75 per share. 34. TyCom common stock, alter initially trading at a closing high of 545.438 on September 1, 2000, began along decline in value to a closing price of $741 on September 27, 2001. Investors were not informed, however, of the Individual Defendants' underlying motive for the Offering until September 12, 2002, at which time it was first publicly revealed that the it Offering was utilized by Kozlowski and Swartz to realize bonuses to be used to repay the undisclosed relocation loans. 35. After achieving their objective of generating bonuses from the Offering to repay the relocation loans, on October 19, 2001, the Individual Defendants caused Tyco and TyCom to announce before the opening of trading that they had entered into a definitive agreement whereby a subsidiary of Tyco would reacquire the outstanding 11% minority interest in TyCorn (representing approximately 56 million common shares) at a ratio of .3133 shares of Tyco common stock for every outstanding share of Tycom common stock. On December 17, 2001, the effective day of the merger, Tyco common stock closed at $55.80 per share, making the effective acquisition price of the merger S 17.48 per share. LX 136501 V,..,N 1 1 929 1489 - 9 - Defendants' Course of Conduct Begins to Be Revealed 36. On September 12, 2002, Tyco issued a press release that specifically described defendant Kozlowski's misconduct. The September 12. 2002 press release announced that Tyco had "filed suit against ... Kozlowski, charging that he misappropriated money and assets from the Company and engaged in a concerted pattern of conduct to conceal larcenous acts from the Board of Directors." 37. According to the press release, the lawsuit filed by Tyco "accuse(dI Kozlowski of fraud and scif-dealing that included, among othcr actions: abusing Tyco's relocation and Key Employee Loan programs and obtaining under false pretenses loans that he used to fund personal expenditures; misappropriating for himself over $100 million, including unauthorized bonuses totaling $58 million and unauthorized Loans of over $43 million; taking personal credit for more than $43 million in charitable donations that actually were made by Tyco; and engaging in a number of self-dealing transactions involving property he sold the Company at inflated prices and real estate that was used by him and his family without compensating Tyco." 38. The lawsuit, which was brought only on behalf of Tyco, sought "to recover all funds rnjsappropriated from Tyco for Kozlowski himself or awarded by Kozlowski to his senior executives and key managers without appropriate authorization from the Compensation Committee of the Board of Directors, plus damages and other forms of relief' including "at a minimum, the recovery of all unauthorized compensation paid by Kozlowski to other employees from 1997 to 2002, repayment of outstanding loans he improperly borrowed from Tyco, and the forfciturc of all incomc and bcncfits rcccivcd by him from 1997 to 2002." 39. The press release identified the following "specific actions thiough which Kozlowski failed in his duties to Tyco": ''-'i'. 1 7429 4 $ - 1 0 - Abuse of New York Relocation Program - In 1995, after he decided to relocate to New York City, Kozlowski transformed a Compensation Committee-approved relocation program intended for all employees into a special program for a few senior executives that was never sanctioned by the Board. Kozlowski obtained these substantial benefits under the unapproved, transformed plan; Beginning in July 1997, he rented a lavish Fifth Avenue apartment in New York at an annual rent of $264,000, paid for by the Company. 2. He used an interest-free loan to buy a Company-owned, $7-million Park Avenue apartment, at depreciated book value and without appraisals, which he never occupied and instead deeded to his ex-wife a few months after the purchase. 3. He sold his Exeter, New Hampshire home to the Company for significantly more than its market value, resulting in a $3-million overpayment to him by Tyco. 4. He had the Company purchase a second, more extravagant, Fifth Avenue apartment in 2001 for $16.8 million, plus $3 million in improvements and Si I million in furnishings, without disclosing to the Board or its Compensation or Audit Committees that this horn was paid for by Tyco and carried by the Company as a corporate asset. He 'grossed up" the benefits he received under the program to insulate himself from New York State income tax liability related to the relocation to New York. Kozlowski knew that the benefits to him and other key executives under such a program required Compensation Committee approval and never sought such approval from the Board. Abuse of Key Employee Loan Program - The long-standing Key Employee Loan Program (KEL) was designed to encourage stock ownership by executives by obviating their need to liquidate shares to meet tax liabilities. However, Kozlowski systematically abused this program, turning it into a personals line of credit. From 1997 to 2002, he took more than 200 loans from the program, borrowing more than $274 million, of which more than $245 million was not used in accordance with the purpose of the program. Instead, he used these funds for a wide variety of personai needs, including purchases of everything from homes, yachts, antiques and furniture to payments to his domestic help. rf i ,#. int V, rf 1 - I I - Unauthorized Credits to KIEL Program - To offset his indebtedness to Tyco, without the knowledge or approval of the Board, Kozlowski directed Chief Financial Officer Mark Swartz to effect credits of $25 million to Kozlowski's KEL account and $12.5 million to Swartz's account. (When the Board learned of these unauthorized journal entries during the course of the investigation, it directed that they be reversed.) Kozlowski continued to abuse the KEL program, and when he left the Company on June 3, 2002, he owed this program $43,840,461, plus interest, all of which is due. Unauthorized Florida Relocation Program - After the 1997 reverse merger with A.DT, 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 of the earlier New York program. He circumvented the need for Compensation Committee approval of this program by creating a program somewhat 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 S29,756.110 in interest-free loans to assemble five lots into a compound and build an estate irn exclusive Boca enclave called "The Sanctuary." Kozlowk.i did not obtain Compensation Committee approval of this program and concealed these benefits from the Board. "TyCoan Bonus" - Unauthorized Forgiveness of Relocation Loans - In September 2000, Kozlowski still owed Tyco more than $37 million, so he "contrived, promoted and fraudulently executed" a plan to obtain relief. He falsely informed the Senior VP of Human Resources that the Board had decided to forgive all of the Florida relocation loans to the more than 40 employees - and to "gross up" this benefit by making each employee whole on an after-tax basis for the forgiveness - as a reward for completion of the TyCom IPO. The unauthorized loan and gross-up program was in addition to a more limited program of cash bonuses and restricted stock awards that the Compensation Committee - unaware of the Kozlowski program - approved the next month. Kozlowski's unauthorized program coat Tyco close to $100 million, including Kozlowsk.i's share of S32,644,338. Ou.# iusoi %'i* 1 2929 1429 - 1 2 - Unauthorized "ADT Automotive Bonus" - In November 2000, still Pressed by his indebtedness to Tyco, Kozlowski contrived another special bonus program. This bonus was supposed to recognize executives for contributions to the divestiture of Tyco's ADT Automotive business via cash and "relocation" benefits, even though the beneficiaries had already recovered the grossed-up cost of thcir "relocations" under the TyCom forgiveness bonus. This "bonus" cost Tyco nearly $56 million, of which $25.6 million benefitted Kozlowski. As with the "TyCom Bonus," Kozlowski led other executives to believe the program was Board approved, which it was not. Adding everything up, including his authorized compensation and the money msappropriated as purported compensation, Koziowaki's income from Tyco in 2000, as reported to the IRS, was an incredible $137,491,353.39. Fraudulently Procured Retention Agreement -In 2001, Kozlowski pressed the Company to sign a retention agreement, which among other things, provided for ongoing compensation and benefits for three years following age 62. The monetary value of this provision, as approved by the Compensation Committee, would have been approximately $20 million. However, he fraudulently deceived the Committee into amending the compensation formula that, unbeknownst to the Committee, would have resulted in a ten-fold increase in the compensation that çuJd be due to him. Unauthorized Payment to Walsh - In early 2001, Kozlowski approved the payment of a $20-million finder's fee to thcn-director Frank Walsh in connection with the acquisition of The CiT Group. Kozlowski and Walsh concealed this payment from the Board, which did not become aware of it until reading a draft proxy in January 2002 and demanded immediate repayment. The Board was galvanized into action by this payment and, in February 2002, undertook a review of all tran.sactions involving senior management. Also, iu early May 2002, the Board hired independcnt counsel, Boies Schiller & Flexner, to represent the Company with regard to the Walsh matter. Frustration of Board's Investigation - As a result of the Walsh payment, the Board began a wide-ranging investigation into the activities of Kozlowski and other senior managers. Throughout early 2002, while paying lip service to the heightened Board oversight, at no time did Kozlowski disclose the enormous compensation he had taken for himself and others over the past several years. From February through Ma) 2002, Kozlowski continued to conceal the facts from the Board and attempted to delay and frustrate the investigation. Does. 11001 VcrWi 29149 - 13 Failure to Report Subpoena to Board - On May 3, 2002, in the course of investigating Koziowski's failure to pay state sales taxes, the Manhattan District Attorney served Kozlowski with a subpoena for records relating to his compensation and his recent purchases. Koziowiski had an affirmative duty to inform the Board of this, but failed to do so. In fact, he did not inform the Board until May 31, the day he learned he was to be indicted. Charitable Contributions - From 1997 to 2002, Kozlowskj committed donations and pledges to charitable organizations with Company money amounting to more than $106 million. At least $43 million of these donations were made for his personal benefit or were represented as his personal donations. For example, in 2001, Kozlowski donated Sl.3 million of Company money to the Nantucket Conservation Foundation, Inc., which in turn purchased property adjacent to Kozlowski's own Nantucket estate to prevent future development of the land. He also pledged $10 million to the California International Sailing Association in his name. Other Tyco contributions were made in his name to schools, colleges, hospitals, and Nantucket institutions with which he had a personal connection. Other Elements of Kozlowski's Fraud and Self-Dealing - Other actions by Kozlowski that formed a pattern of fraud and self-derng included expensing to the Company the following items, among others: 1. Millions of dollars for the personal use of his various residences and purchases of furniture and other items for these residences; 2. $700,000 for a personal investment in the movie, "Endurance; 3. More than S million for a lavish celebration of his wife's birthday in Sardinia, Italy; 4. Reimbursement for S million of business expenses without proper documentation for such items as jewelry, clothing, wine, club membership dues, flowers and a private venture; and. At least Si 10,000 for the corporate use of his personal yacht, the "Endeavour." 40. On SeptemberJ7, 2002, Tyco filed a Form 8-K with the SEC further disclosing and describing Tyco's findings in its investigation of what it termed to be a three-year 'pattern of improper and illegal conduct by which [Tyco's top corporate officers] enriched themselves at the _., - 14- expense of the Compm y with no colorable benefit to the Company and concealed their conduct from the Board and its relevant committees." The September 17, 2002 Form 8-K also implicated defendant Swartz in the misconduct. 41. The pattern of illegal and inappropriate conduct included the practice of making undisclosed "relocation loans" to selected officers and/or executives of Tyco. Although Tyco had adopted and implemented a relocation program that, by its terms, "was intended not to discriminate in scope, terms or operation in favor of executive officers or directors of the Company," in 1995, the Form 8-K reveals that defendant Kozlowski nevertheless "implemented a different, more generous New York relocation plan, tailored to the individual circumstances of five or six executives and one assistant, which had not been authorized by the Compensation Committee of the Board." This information was in direct contravention of the representations contained in the Prospectus, which, as discussed above, alleged that as of September 30, 1999, the total amount of loans outstanding under the relocation program totaled only S18,569,137. 42. Tyco disclosed in the Form 8-K that "[a)s a result of the foregoing (relocation loan program), certain executive officers used the relocation program to receive non-qualifying loans and unauthorized benefits that were not generally available to all salaried employees affected by relocations, or were not related to any Tyco relocation, enriching themselves with no colorable benefit to Tyco." 43. Defendant Kozlowski created the relocation loan program to confer substantial benefits on himself and the other Individual Defendants and neglected to disclose the existence, extent, and nature of the relocation loan program. The Form 8-K reveals that as of September 17, 2002, defendant Kozlowski had "improperly borrowed approximately $29,756,000 in non- u_.i ,a,aiRq - 15 - qualifying relocation loans to purchase land and construct a home in Boca Raton, Florida during the years 1997 to 2000, and improperly borrowed approximately $7,012,000 in non-qualifying relocation loans to purchase a cooperative 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 loans to S61,690628. 44. Defendant Swartz rcccived a total of $33,097,925 in unauthorized interest free loans (including $7,862,532 in loans outstanding as of September 30, 1999) and defendant Garvey received a total of $5,000,000 in unauthorized interest free relocation loans. 45. The September 17, 2002 Form 8-K contained a discussion titled "The 'TyCom Bonus' Misappropriation" which revealed that, contrary to the representations made in the July 26, 2000 Prospectus, Tyco was motivated to make the public offering of TyCorn stock on July 26, 2000 to generate funds to forgive the unauthorized interest-free loans and thereby eliminate the need to include the full charges for the loans on Tyco's financial statements. The Forni 8-K revealed, in relevant part: In September 2000, Mi. Kozlowski caused Tyco to pay a special, unapproved bonus to 51 employees who had relocation loans with the Company— The bonus was calculated to forgive the relocation loans of all 51 employees, at a total cost of $56,415,037, and to pay compensation sufficient to discharge all of the tax liability due as a result of the forgiveness of those loans. This action was purportcdly related to the successful completion of the TyCorn 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 W. Swartz SI 6,611,000. These benefits were not approved by, or discloscd to, the Compensation Committee or the Board of Directors. Indeed, the opposite occurred: each of the fifty-one participating employees who was offered the forgiveness was asked to sign a confidentiality agreement in which they agreed not to disclose either the fact of the bonus or its terms to anyone other than the recipient's personal financial, tax or legal ieii - 16- advisors. Breach of this confidentiality agreemcnt would result in forfciturc of the bonus. Some employee beneficiaries of this forgiveness were not even permitted to keep a copy of their signed agreement. According to Ms. Patricia Prue, Tyco's Senior VP of Human Resources, Mr. Kozlowski told her to process the forgiveness and the gross-ups and asserted that the Board had approved the program. Upon Ms. Prue's request for documentation of the authorization, Mr. Kozlowski sent her and her supervisor, Mark Swartz, a memo on September 11, 2000, for her files indicating that "a decision has been made to forgive the relocation loans for those individuals. . whose efforts were instrumental to successfully completing the TyComlPO." Attached to the memorandum was the list of employees who were to receive the forgiveness benefit. Mark Foley, a Vice President of Finance, prepared a memorandum signed by Mr. Swartz [the "Swartz Memorandum"] that cxplaincd the accounting treatment for the near-$100 million charge (for the relocation loan forgiveness). The memo stated: "The sale of 14% of TyCom generated a one-time gain of approximately $1.76 billion on the books of Tyco. We have decided to award special bonuses to various Tyco employees for their efforts ovcr the past few years ir 1 enhancing the value of TyCom and thereby contributing td this gain. Selected employees will receive their bonus in the form of cash, forgiveness of relocation loans, and/or Tyco Common shares under Tyco's restricted stock program." 46. By Tyco's own admission in its Form S-K, the Prospectus misrepresented that defendants' primary motive for issuing stock to public investors in the Offering was to support the development of TyCom's global telecommunications network, thereby creating the illusion of the probability of benefitting TyCorn's shareholders in the future as TyCom continued to expand its business. The Prospectus failed to disclose the Individual Defendants' intent to use the proceeds from the initial public offering to forgive millions of dollars it had issued in unauthorized loans, as described in the aforementioned Swartz Memorandum. øi' i3Ot ic.l 2929 l48 - 17 - 47. Each of defendants Kozlowski and Swartz arc currently subject to criminal charges relating to their "larcenous acts." 48. On a conference call with investors before the opening of the U.S. securities markets on September 25,2002, Edward Breen, Kozlowski's replacement as Tyco's CEO, informed investors that Tyco would take a pre-tax charge of $2.0 to $2.5 billion to write-down the value of TyCom. Breen said that the charge was necessary because TyCom had been building global fiber-optic network amid a glut of such capacity. 49. Tyco closed on September 25, 2002, in the aftermath of the revelation of the Individual Defendants' larcenous acts and the write-down of Tycom's value, at $15.00, making the imputed value of class members' TyCom shares (based on the .3133 exchange ratio) approximately $4.70 (as compared to the $3200 offering price). $ 50. 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 or at the market price subsequent to the Offering if the true facts concerning the Individual Defendants' executive compensation and anticipated bonuses had been disclosed in the Prospectus. COUNT I AEainst Defendants for Violation of Sections 11 and 15 of the Securities Act 51. Plaintiff incorporates each of the foregoing paragraphs as if fully set forth herein except those allegations that sound in fraud which arc specifically excluded. This Count is asserted against all defendants for violations of Sections 11 and 15 of the Securities Act, 15 U.S.C. §§ 77(k) and 77(o). V_ 1 7179 IgI -18- 52. TyCom is the issuer of the stock sold pursuant to the July 26, 2000 Prospectus. Defendants Kozlowski, Garvey, and Swartz signed the Registration Statement that incorporated the materially false and misleading July 26, 2000 Prospectus. Kozlowski and Swartz were officers and directors of the Company at the time of the offerings. 53. The Registration Statement, which was supplemented by the July 26, 2000 Prospectus for the offerings, was inaccurate and misleading, contained untrue statements ofrnaterial facts, omitted to state other facts necessary to make the statements made not misleading, and failed to disclose material facts as described above. 54. Defendants Kozlowski, Garvey. and Swartz, as directors and officers of TyCom and as signatories of the Registration Statement accompanying the July 26, 2000 Prospectus filed with the SEC were 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 documents were true and that they disclosed all material facts. Defendants are primarily liable under Section 11 of the Securities Act. 55. Plaintiff and the other members of the Class acquired shares of TyCom pursuant to, or traceable to, the July 26, 2000 Prospectus without knowing of untrue statements or omissions of material facts. 56. Plaintiff and the other Class members have sustained damages. 57. Defendants Kozlowski, Swartz, Garvey, and Tyco were controlling persons of TyCom and had the ability to cause the corporate defendants to.engage in the misconduct alleged herein. uCa I11 vLI 22.14$ - 19 - = 58. This action was brought within one year after the discovery of the untrue statements and omissions and within three years after TyCom common stock was offered to the public. 59. By virtue of the foregoing, defendants have violated Sections II and 15 of the Securities Act. COUNT II Against Defendants Tyco, TyCom, Swartz, Kozlowski, and Garvey for Violation of Section 10(b) and 2O(& of the Exchanpe Act 60. Plaintiff realleges and incorporates by reference each and every allegation contained above. 61. Throughout the Class Period, defendants participated ma course of conduct involving misrepresentation and concealment of adverse material information about executive compensation and the business and finances of Tyco and TyCom, as specified herein. 62. Throughout the Class Period, defendants employed devices, schemes and artifices to defraud, while in possession of material adverse non-public information and engaged in acts, practices, and a course of fraudulent conduct as alleged herein in an effort to assure investors of TyCom's unimpeded progress and expansion, which included the making of, or the participation in the making of, untrue statements of material facts and omitting to state material facts necessary in order to make the statements made about TyCom and its business, in the light of the circumstances under which they were made, not misleading. This conduct operated as a fraud and deceit upon the purchasers of TyCom securities during the Class Period. 63. The Individual Defendants, as officers and directors of TyCom and Tyco, are liable as direct participants in the wrongs complained of herein. The Individual t)efendants were able to ta. 11630 l VCTO 2 MIP I d9 -20- and did control, directly or indirectly, the content of the public statements and financial statements disseminated by TyCom. With knowledge of the falsity of the statements contained therein and in the reckless disregard of the true purpose of the TyCom spinoff, these officers and directors caused the complained of misstatements and omissions of material fact as alleged herein, and knowingly or recklessly failed in their duty to update or correct misleading statements issued by them or on their behalf. 64. Throughout the Class Period, the defendants had actual knowledge of the misrepresentations and omissions of material fact set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and to disclose such facts, cvcn though such facts were available to them. 65. As a result of the deceptive practices and false and misleading statements and omissions, the market price of TyCom's common stock was artificially inflated during the Class Period. In ignorance of the false and misleading nature of the representations described above and the deceptive and manipulative devices employed by said defendants, plaintiff and the other members of the Class, in reliance on either the integrity of the market and/or directly on the statements and reports of defendants, purchased TyCom's common stock at artificially inflated raLial 66. Had plaintiff and the other members of the Class known of the material adverse information not disclosed by defendants, or had they been aware of the truth behind defendants' material misstatements, they would not have purchased TyCom's securities at artificially inflated prices. 136501Vc,Wl 2929 1469 - 21 - 67. Defendants Kozlowski, Swartz, Garvey, and Tyco were controlling persons ofTyCom and had the ability to cause the corporate defendants to engage in the misconduct alleged herein. 68. By virtue of the foregoing, defendants have violated Sections 10(b) and 20(a) of the Exchange Act. 69. Plaintiff and the other members of the Class have been damaged by defendants' violations as described in this Count and seek recovery for the damages caused thereby. PRAYER FOR RELIEF WHEREFORE, plaintiff; on behalf of herself and the other members of the Class, prays for judgment as follows: 1. Declaring this action to be a proper class action maintainable pursuant to Rule 23(b)(3) of the Fed.R.Civ.P. and declaring plaintiff to be a proper Class representative; 2. Awarding plaintiff and the other members of the Class damages suffered as a result of the wrongs complained of herein together with appropriate interest; 3. Awarding plaintiff and the other members of the Class their costs and expenses of this litigation, including reasonable attorneys' fees and experts' fees and other costs and disbursements; and 4. Awarding plaintiff and the other members of the Class such other and further relief as may be just and proper under the circumstances. S Uocl 134ju1 Vcrt 2929i4$9 -22- JURY TRIAL DEMANDED Plaintiff demands a trial by jury of all issues so triable. Dated; July 23, 2003 Respectfully submitted, LAW OFFICES OF JAMES V. BASH1AN, P.C. By: n" - finesVB hian 271 Route 46 West, Suite F207 Fairfield, New Jersey 07004 (973) 227-6330 Attorney for Plaintiff I WOLF POPPER LLP Robcrt M. Kornreich Robert C. Finkel Caroline S. Curtiss 845 Third Avenue New York, NY 10022 (212) 759-4600 Co-Counsel for Plaintiff Ol 136501 Vcf 1 299I4$9 -23-