Former shareholders of Tyco International Ltd., whose former chief executive and chief financial officer were convicted of fraud, have been certified as a class to sue the company and its accounting firm, PricewaterhouseCoopers.
Judge Paul Barbadoro made the ruling on June 12 in securities fraud cases consolidated in U.S. District Court in New Hampshire. However, he removed one lead plaintiff, Voyageur Asset Management, saying it could not prove it was harmed.
The lawsuit alleges that former executives and board members, including former Chief Executive Dennis Kozlowski and former Chief Financial Officer Mark Swartz, operated the company as a criminal enterprise to enrich themselves.
Making the case a class action means anyone who bought Tyco stock between Dec. 13, 1999, and June 7, 2002, is eligible to share in any judgment or settlement. According to some estimates, investors lost $60 billion.
Shareholder lawyer Jay Eisenhofer said Tuesday there had been no significant settlement talks, but it would be in the company’s best interests to settle.
“The scope of the potential liability puts the company at risk,” Eisenhofer said. “Nobody has any desire to do that, but that’s the position they find themselves in now.”
Tyco spokeswoman Sheri Woodruff said the company was disappointed by the ruling, but would continue defending itself. The merits of the shareholders’ claims have not been considered yet.
The ruling comes a year after Kozlowski and Swartz were convicted in a New York state court on multiple counts of grand larceny, conspiracy, securities fraud and falsifying business records.
Prosecutors accused the two of conspiring to defraud Tyco of millions of dollars to fund extravagant lifestyles. The two were sentenced in September to eight-and-one-third to 25 years in prison. A judge refused to release them on bail while they appeal.
The shareholder lawsuit alleges the defendants misrepresented the value of Tyco and companies it acquired under Kozlowski’s leadership in a giant accounting fraud scheme.
Tyco fought the class certification by arguing that some plaintiffs still own some or all of their Tyco stock, and its value would be hurt by the lawsuit. Barbadoro said that’s not necessarily true, and even if the lawsuit depresses Tyco’s stock price, those shareholders still have an interest in pursuing their claims and should be allowed to join the lawsuit.
Barbadoro likewise dismissed Tyco’s argument that former shareholders constituted several classes based on whether they sold their stock before or after several disclosures by the company that caused its stock price to plummet.
Tyco also argued that making the case a class action would be too unwieldy. Barbadoro acknowledged the case’s complexity, noting that 70 million documents have already been produced in answer to requests for evidence and that lawyers plan to take sworn statements from more than 200 people.
“Complexity alone, however, cannot be the basis for refusing to certify a class where common issues predominate and alternatives to class certification do not exist for the vast majority of the allegedly injured parties,” he wrote.
Tyco makes everything from telecommunications equipment to home alarm systems. The company, which is registered in Bermuda, was run from Exeter, N.H., at the time of the alleged fraud. It now operates from West Windsor, N.J.
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