The Tyco matter was a Securities Fraud Class Action arising from Accounting Fraud by the company’s former senior management. Tyco International, Ltd., a diversified conglomerate operating principally in security systems, fire protection, electronics, and healthcare products, expanded rapidly during the late 1990s and early 2000s through an aggressive acquisition strategy led by Chief Executive Officer L. Dennis Kozlowski and Chief Financial Officer Mark H. Swartz. Following investigations into its accounting practices, Tyco announced it would restate its financial statements for 1998 through the first quarter of 2003 to correct accounting irregularities. As the underlying conduct became known to the market, Tyco’s common stock declined by more than forty percent over the relevant disclosure period.
The Lead Plaintiffs—a group of institutional investors including the Plumbers and Pipefitters National Pension Fund, several United Association pension plans, the Teachers Retirement System of Louisiana, and the Louisiana State Employees Retirement System—brought claims on behalf of all purchasers of Tyco common stock and debt securities at inflated prices during the Class Period. The Lead Plaintiffs alleged that the defendants—former Tyco executives, board members, and Tyco’s auditor, PricewaterhouseCoopers—intentionally misstated Tyco’s financial statements, manipulated purchase accounting on acquisitions, concealed material related-party loans and self-dealing transactions, misrepresented that acquisitions would be immediately accretive to earnings, and operated the company for the benefit of senior executives at the shareholders’ expense. The plaintiffs sought damages under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, together with claims under Sections 11, 12, and 15 of the Securities Act of 1933, premised on the inflation in Tyco’s securities attributable to the alleged fraud.
Lead Plaintiffs engaged Professor Emeritus Mark E. Zmijewski of the University of Chicago Booth School of Business to analyze the price impact of the alleged fraud. Professor Zmijewski, supported by Keith Bockus, submitted an October 19, 2007 affidavit that evaluated per-share inflation for each Tyco equity and debt security traded during the Class Period and an estimate of aggregate damages.
The litigation was resolved by settlement before judgment. On May 14, 2007, Tyco agreed to establish a $2.975 billion cash settlement fund, at the time the largest cash settlement ever paid by a corporate defendant in securities class-action history. On July 6, 2007, PricewaterhouseCoopers agreed to pay an additional $225 million, then the second-largest auditor settlement on record. Judge Barbadoro granted final approval of the settlement, which remains among the largest securities fraud class-action recoveries ever achieved.