Will large institutional investors opt out of the proposed settlements in the In re Tyco International Ltd. Securities Litigation MDL Docket No. 02-1335-PB?
Pursuant to the Notice of Proposed Settlement sent to investors, the decision to be excluded from the Class must be made by September 28, 2007:
To exclude yourself from the Settlement, you must send a letter by mail to the Claims Administrator saying that you want to beexcluded from In re Tyco International Ltd. Securities Litigation Settlement. If you wish to exclude yourself from the Class, be sure toinclude your name, address, telephone number, and signature, and mail your exclusion request postmarked no later thanSeptember 28, 2007 to:Tyco International Ltd. Securities Litigation Settlement c/o The Garden City Group, Inc., Exclusions, Claims Administrator, P.O. Box 9199, Dublin, OH 43017-4199. Requests for exclusion should also list the amount and type of all Tyco Securities purchased, otherwise acquired, or sold during the Class Period, the prices paid or received, the date of each transaction and the amount or number of Tyco Securities held as of the beginning of the Class Period on December 13, 1999. You cannot exclude yourself on the website, by telephone or by e-mail. If you do not follow these procedures – including meeting the date for exclusion set out above – you will not be excluded from the Class, and you will be bound by all of the orders and judgments entered by the Court regarding the Settlement. You must exclude yourself even if you already have a pending case against any of the Tyco Settling Defendants’ Releasees or the PwC Releasees based upon any Released Claims.
I believe that situations justifying exclusions from securities fraud class action settlements are the exception and not the norm. But Tyco may be the exception.
Analysis of Settlement:
Procedural History and Settlement
Beginning in February 2002, Tyco and certain former directors and officers Ire named as defendants in over 40 purported securities class action suits. Most of the securities class actions were transferred to the United States District Court for the District of New Hampshire for coordinated or consolidated pretrial proceedings.
On January 28, 2003, a consolidated securities class action complaint was filed in these proceedings. On June 12, 2006, the court entered an order certifying a class:
consisting of all persons and entities who purchased or otherwise acquired Tyco securities betIen December 13, 1999 and June 7, 2002, and who were damaged thereby, excluding defendants, all of the officers, directors and partners thereof, members of their immediate families and their legal representatives, heirs, successors or assigns, and any entity in which any of the foregoing have or had a controlling interest.
On June 26, 2006, Tyco filed a petition for leave to appeal the class certification order to the United States Court of Appeals for the First Circuit. On September 22, 2006, the United States Court of Appeals for the First Circuit denied Tyco’s petition.
On July 6, 2006, the lead plaintiffs filed in the United States District Court for the District of New Hampshire a motion for a permanent injunction against prosecution of the class action styled Brazen v. Tyco International Ltd., et al. that was certified by the Circuit Court for Cook County, Illinois. On October 26, 2006, the court denied plaintiffs' motion for injunctive relief without prejudice.
On May 14, 2007, Tyco settled the 32 securities consolidated class actions. The settlement does not resolve the following securities cases, which remain outstanding: Stumpf v. Tyco International Ltd., New Jersey v. Tyco International Ltd., et al., Ballard v. Tyco International Ltd., Sciallo v. Tyco International Ltd., et al., Jasin v. Tyco International Ltd., et al., and Hall v. Kozlowski, et al. The proposed settlement does not release claims arising under the Employee Retirement Income Security Act of 1974, 29 U.S.C. Sec. 1001, et seq. ("ERISA"), which are not common to all Class Members, including any claims asserted in Overby, et al. v. Tyco International Ltd., Civil Action No. 02-MD-1357-PB.
The Class Action releases all claims against Tyco, the other settling defendants and ten other individuals in consideration for the payment of $2.975 billion from Tyco. PricewaterhouseCoopers has agreed to make a payment of $225 million. L. Dennis Kozlowski, Mark H. Swartz and Frank E. Walsh, Jr., are excluded from the settling defendants, and the class will assign to Tyco all of their claims against defendants Kozlowski, Swartz and Walsh. In exchange, Tyco will agree to pay to the certified class 50% of any net recovery against these defendants.
The Settlement is Facially Attractive
The settlement amount of $3.2 billion is relatively large as far as securities fraud class action settlements go. Plaintiffs claim it is that largest single payment by one company to settle a securities fraud suit.
While the settlement notice does not state the amount of estimated aggregate damages, I can estimate that Lead Plaintiff’s Counsel has estimated it to be $10.8 billion. The Settlement Notice states that:
[I]f all Class Members make a claim against the Settlement Fund, the average payment to Class Members will be $1.474 per share of Tyco common stock, after taking into consideration the relative average payment that would be paid to purchasers of Tyco Notes during the Class Period (estimated at approximately 8% of total damages). Of this amount, fees and expenses requested by the attorneys will not exceed $0.30 per share of Tyco common stock.
To put this in perspective, the Settlement Notice also states:
The Class Representatives estimate that the approximate average amount of recoverable damages to members of the Class who purchased Tyco common stock were this case to go to trial would be approximately $5.423 per share based upon an estimate of 1.997 billion outstanding Tyco shares as of the last day of the Class Period.
This implies that the recovery represents 32% of the total losses, not including the notes. This percentage recovery is not a trivial amount, but is not great, considering the nature of this particular case where certain of the defendants Int to jail and the ability to collect on a judgment is not an issue.
By way of comparison, in 2005, the California Public Retirement System, (“CalPERS”), California State Teachers’ Retirement System (“CalSTERS”), and the Los Angeles County Employee Retirement Association (“LACERA”) announced a combined opt out settlement of $257.4 million in WorldCom. The settlement appears to be part of a larger settlement of $652 million by a group of state and local retirement funds and insurance companies, which its attorneys claimed was 83% higher than the class action settlement. For some of the funds involved, this opt-out settlement purportedly represented more than 70 percent of their losses. Five New York pension funds announced a combined settlement with a multiple of three times over the class action. Moreover, the funds claimed that this settlement represented over 60% of their losses.
In 2007, in AOL Time Warner, CalSTERS claimed a 6.5 multiple on a settlement of $105 million out of damages of $135 million. The State of Alaska claimed a multiple of 50. The University of California claimed a multiple range of 16-24 on a settlement of $246 million out of a loss of $550 million. The State of Ohio also claimed a multiple of about 16 after attorneys’ fees. The Ohio funds settled for $144 million, which it claims, is $138 million more than it would have received under the class action settlement, and represents 36% of its losses. A separate group of smaller investments represented by the same counsel did not fare as Ill with settlements of only about 15% of damages compared to the class recovery of a purported 1.4%.
While the recovery in this case purportedly represents 32% of Lead Plaintiffs’ Counsel estimated damages one must look at their damage model and consider the alternatives they discarded.
More important, one needs to consider an institutional investor’s transactions in light of the Plan of Allocation attached to the Notice and the estimated inflation. The range of damages to class members is set out in the Plan of Allocation and shows, depending on what date the purchase took place, damages (or inflation per share) range from $0 to $8.29 per share. It may be that damages allocated to the securities purchased by a particular institutional investor will represent more or less than the average based on factors considered by Lead Plaintiffs’ Counsel. For example if an investor acquired shares in the Mallinckroft acquisition or in the June 6, 2001 secondary public offering, you will get a 10% premium. A 10% premium on a Section 11 claim is not large and would be worthy of further exploration if those are the shares purchased by you.
Similarly, if an investor purchased notes issued during the Class Period, the investors claims may be stronger than that of the Class as a whole.
The Settlement Amount Appears Low In The Light of the Public Facts.
Based on stock data reviewed that needs to be adjusted for various splits, Tyco stock dropped from over $235 per share ($58.75 before adjustment) in December 2001 to as low as $109 ($27.25)per share in January 2002, when questions arose about the accuracy of Tyco's bookkeeping and accounting. Bad news continued to come out over the next few months concerning the fraud and the theft. By the end of the Class Period the stock had dropped to $40 ($10)per share, though over the next 90 days (the 90 day lookback period) the stock had risen to as high as $65 per share with a moving average (or mean) on the 90th day of $53.896 per share. ($14.974 pre-split).
Based on 1.997 billion shares outstanding, the loss in market capitalization from the end of December 2001 to the end of the Class period, thus, was $95 billion. Sixty percent of Tyco’s value was lost in January alone as the NASDAQ and the S&P 500 held their value resulting in a market capitalization drop of $71.19 billion.
When compared against the S&P 500, the NASDAQ Index and the Dow Jones Index, it does not appear that market drops were the causation of any of the drops.
A simple event analysis shows Tyco’s stock closed at $235 ($58,75) per share on December 31, 2001, before the bad news began to come out to $140.6 by January 31, 2002 and $92.4 ($23.1)by the day after the first class action lawsuits Ire filed on February 4, 2002.
By the end of the Class Period, on June 7, 2002, the stock had fallen to $40 dollars a share ($10) .
To recap, adjusted for the 4 for 1 split on July split, that is a decrease from $58.75 to $10. But pursuant to 15 U.S.C. Section 78u-4(e)(1) damages can be no more than the purchase price in Class Period and the 90 Look-Back median of $14.974.
Thus, absent other causation factors, the average payment to Class Members of $1.474 per share appears fairly small in comparison to the $43.776 recoverable drop of the stock price. The settlement represents only 3% of the drop in market capitalization over the Class Period.
Why Lead Plaintiffs’ Counsel believes that at most there is at most $8.06 dollars worth of inflation, or damages, for those who bought before January 29, 2002, and why those who bought in betIen January 29, 2002 and January 6, 2002 have only $0.96 in damages is unexplained.
One can only surmise that they have calculated damages assuming that nearly the entire fraud for those who bought before January 29, 2002 was revealed on or about that date, and that the latter drops were actionable only based on statements made after that date. Based on an event study,, that does not seem plausible. Also unexplained is the failure to account for the remaining $23 in stock drop in January alone.
12/31/2001- 58.9
1/11/2002- 50.25
1/14/2002- 52.4
1/15/2002- 47.95
1/28/2002- 42
1/29/2002- 33.65
2/4/2002- 29.9
2/5/2002- 23.1
In essence, Lead Plaintiffs’ Counsel has discounted almost $27 of the $35.716 in potential damages in estimating losses to the portion of the Class, which bought before January 29, 2002. They discount further to settle for an average of $1.474 per share.
Liability Appears Extremely High
Liability in this case is almost uncontestable. We know from the SEC press release of April 17, 2006 , concerning its action, which Tyco settled for $50 million, that:
· Tyco inflated operating income by at least $500 million from its many acquisitions by undervaluing acquired assets while overvaluing acquired liabilities. Tyco also manipulated various reserve accounts to meet earnings forecasts, according to the complaint.
· TYCO inflated operating income by $567 million betIen 1998 and 2002 through the recording of fees that Tyco's ADT Securities Services Inc. subsidiary charged to dealers but that had actually been offset by ADT's purchase of security monitoring contracts from them. The transaction lacked economic substance, the SEC said, and should not have been recorded as income.
· Tyco violated the anti-bribery provisions of the Foreign Corrupt Practices Act when employees of its Earth Tech Brasil Ltda. subsidiary paid Brazilian officials to obtain business in that country.
· "The Tyco accounting fraud was orchestrated at the highest levels of the company, but carried out at numerous operating units and management levels of the company," Scott W. Friestad, associate SEC enforcement director, said in a statement. "'Push down' frauds like this are especially difficult to detect and investigate."
· Tyco failed to disclose in its proxy statements or annual reports the executive compensation, indebtedness and "related party" transactions that Ire widely reported and led to the demise of the management team led by CEO L. Dennis Kozlowski.
Further, Kozlowski and former CFO Mark Swartz Ire convicted of grand larceny, falsification of business records and conspiracy as a result of their scheme to loot the company through multimillion-dollar "loans" that Ire ultimately forgiven, as Ill as unauthorized bonuses and exorbitant corporate perks. They are serving eight-and-a-half to 25 years in prison for their roles in the fraud.
Other Lawsuits
The Class Action settlement does not resolve all securities cases, and several remain outstanding. On November 27, 2002, the State of New Jersey, on behalf of several state pension funds, filed a complaint, New Jersey v. Tyco, in the United States District Court for the District of New Jersey against Tyco, our former auditors and certain of our former officers and directors. In addition, the proposed settlement does not release claims arising under ERISA, that are asserted in the consolidated ERISA class action, Overby, et al. v. Tyco International Ltd.
According to a press release dated June 13, 2007, a judge has refused to dismiss lawsuits by three smaller groups of former Tyco International Ltd. shareholders, a month after the company agreed to settle most shareholder claims arising from mismanagement and looting by former top executives. Still alive are lawsuits :
“by the state of New Jersey, former shareholders of AMP Inc. and former shareholders of a one-time Tyco subsidiary, TyCom Inc. U.S. District Judge Paul Barbadoro on dismissed some counts and defendants, but kept alive most of their claims against Tyco, its former executives and directors and the company's former auditor, PricewaterhouseCoopers LLP. ... [Barbardoro] also refused to dismiss most of New Jersey's securities fraud and racketeering claims -- valued at $100 million -- on behalf of its pension and other investment funds, including one that helps fund the state's public schools. ...”
Recoverable Assets
The ability to collect on any judgment does not appear to be an issue. The company has about $20 billion in annual revenues and, but for the Class Action settlement would have been profitable this last quarter. It has over $1.3 billion in cash and over $15 billion in shareholder revenue as of June 29, 2007.
Conclusion
It is difficult to second-guess a settlement when onw has not participated in the litigation. Missing for review are defendants arguments and plaintiffs discovered weaknesses, if any. Nevertheless, based on the above preliminary analysis, an investor with large losses that stands a good chance of increasing recovery against Tyco and other defendants if it opts-out of the settlement. Comments and criticism of this analysis can only be helpful.
When will non USA residents know whether or not they are likely to receive any share of the pay out?
Posted by: Gilbert A Hay | October 16, 2011 at 08:59 PM
Are you aware that there are currently many lawsuits brought against ADT by previous ADT Authorized Dealers and that there is a current Class Action regarding ADT's mishandling of certain connection fee reimbursments? I believe the class is worth roughly $200 million. This might affect future stock prices for Tyco.
Posted by: Unknown | June 26, 2008 at 02:45 PM
how can i take part in the class action as i held tyco stocks
Posted by: jacob horshidi | December 28, 2007 at 08:16 PM
how can i take part in the class action as i held tyco stocks
Posted by: jacob horshidi | December 28, 2007 at 08:15 PM